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Market Commentary

Market Commentary

January 22, 2015
10-YEAR NOTES   103-24 (+13)
FN 3.5% COUPON   105-01 (+03)
SUPPORT   2.40%
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  More Americans filed for unemployment benefits than expected last week with Jobless claims down -10K to 307K vs. 317K prior revised (consensus 300K). The total Jobless claims number has remained above 300K for the three straight weeks for the longest run since July 2014, and two weeks ago claims reached the highest level since June 2014. On a more positive note, the U.S. finish 2014 for the strongest year of job creation since 1999, and this momentum could continue into 2015 for another year of rapid job growth. Continuing claims increased by +15K to 2.44 Million for the week ended January 10th. The FHFA House Price Index (HPI) came in flat in September, rose +0.6% in October, and for November the Index defeated expectations, up +0.8% vs. +0.4% prior revised (consensus +0.3%). Year-over-Year the FHFA House Price Index increased from +4.34% to +5.3%.
   Treasuries declined yesterday as the Bank of Canada unexpectedly cut its overnight benchmark interest rate, the ECB moved closer to initiating a QE stimulus program, and oil pushed into positive territory. The value of the Canadian dollar plunged the most in over three years within the first few minutes on the interest rate cut announcement. Oil futures rose +1.4% to retrace its prior -4.7% slide; oil fell nearly 50% from June of last year. The bid for quality continues, keeping treasury yields near record lows, as Russia's lowered credit rating/sanctions and negative Eurozone interest rates/inflation growth spur demand for safety in U.S. debt. Moody's lowered Russia's credit rating to Baa3, and many fear that it will slip even further into junk bond territory and have pulled out of the Russian bond market adding further support for U.S. bond markets. Eurozone CPI slipped into negative territory for December. Today the European Central Bank will meet to discuss future interest rates and the current state of the economy. The ECB Executive Board released a proposal yesterday afternoon that suggests as much as $1.28 trillion in QE asset purchases through the end of 2016 with roughly $50 Billion in purchases a month with unchanged interest rates. Today ECB President Draghi will announce the final QE decision and, while the market has already priced in the expectation of asset purchases, we could see some volatility. The Euro has declined for six straight months in anticipation of a bond-buying program, it ended 2014 down -12% vs. the dollar for the biggest loss since 2005 and has extended the losses into 2015 (down almost -4%).
   Yesterday, the 10-Year note sold-off -15 ticks, pushing yields up +5.4 bps to just above resistance at 1.861%. The coupon stack widened 1-3 ticks in the production coupons led by the 4.0/3.5 swap at +3 ticks. MBS outperformed treasury hedges by 2-3.5 ticks led by the 3.0% at +3.5 ticks wider, short term Volatility declined -5 bps, and longer term Volatility declined -1 bps. The curve bear steepened, with 2s10s up +3.8 bps to 135.3, pulling the 20 day average to 141.4 vs. 147.2 prior. Long-end yields rose, pushing the 30-Year bond up +4.0 bps to 2.441%. Even with the 30-Year bond near all-time record lows, treasuries are still looking attractive vs. foreign debt. The 30-Year current coupon climbed to 2.59% vs. 2.56% prior, and the 15-Year rose +4.0 bps to 1.95 vs. 1.91% prior. 15/30 swaps gained 1-2 ticks in lower coupons, led by a 2 tick gain in the 2.5/3.0 swap. G2/FN rallied 1.0-2.0 ticks in the production coupons led by a +2.0 tick increase in the 3.0% coupon. The G2/FN 3.5% swap increased to 0-03 vs. 0-01.5 prior. Today, treasuries are at session highs in anticipation of the European Central Bank's QE program, and the curve has bull flattened with 2s10s down -0.8 bps with yield on the 10-Year note hovering near resistance at 1.829%.
This Week's Events:
01/22 Jobless Claims 05:30 January 17 300K 307K 316K 317K
01/22 Continuing Claims 05:30 January 10 2400K 2443K 2424K 2428K
01/22 FHFA Home Price Index MoM 06:00 November 0.3% 0.8% 0.6% 0.4%
01/23 Existing Home Sales 07:00 December 5.08 Millions - 4.93 Millions -
01/23 Existing Home Sales MoM 07:00 December 3.0% - -6.1% -
01/23 Leading Index 07:00 December 0.4% - 0.6% -
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