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Market Commentary

Market Commentary

January 23, 2015
10-YEAR NOTES   103-28.5 (+14.5)
FN 3.5% COUPON   105-05.5 (+05.5)
SUPPORT   2.40%
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   The Chicago Fed National Activity Index for December fell to -0.05 and the prior was revised up from 0.73 to 0.92 (consensus 0.48); a reading below 0 indicates below-trend growth. The Markit PMI Manufacturing Index posted 54.8 in November, 53.9 in December and the preliminary reading for January has Markit PMI at a one year low of 53.7 (consensus 54). The weakness in Markit PMI reflects a fall in Factory Orders, which dropped to the lowest reading since January 2014 at 54.7 vs. 55.4 prior. Existing home sales rose to 5.04 Million vs. 4.92 Million prior revised (consensus 5.08 Million) for a monthly gain of +2.4% vs. -6.3% prior revised (consensus +3.0%). Contract closings increased +2.4% to an annual rate of 5.04 Million vs. 4.92 Million in the month prior. The Leading Index slipped less than expected at 0.5% and the prior was revised down from +0.6 to +0.4 (consensus +0.4%).
   Treasuries got a boost yesterday as the European Central Bank (ECB) President Mario Draghi announced that the ECB will launch a new quantitative easing program in March of this year. The QE program will include monthly asset purchases of $60 Billion and will continue through September 2016 for a total purchase of $1.14 trillion Euros ($1.28 trillion). The Euro has been in decline for the past six months, it ended 2014 down -12% vs. the dollar for the biggest loss since 2005 and has extended those losses into 2015. In reaction to the news we have seen a sharp move lower in the Euro, a spike in volatility, and a small rise in European stocks. The Stoxx Europe 600 Index added +1.9% and the Euro weakened to an 11-Year low. Eurozone bond yields declined on the news including bond yields in: Germany, France, Italy and Spain. German 10-Year debt declined -8 bps to 0.45%, the French 10-Year note dropped -9 bps to 0.62%, Italy's 10-Year yield fell to 1.556 (lowest since 1993), and the Spanish 10-Year yields declined to a record low at 1.397%. US treasuries got a boost with the 10-Year note up +20 ticks. With negative interest rates in Russia and Germany, negative MoM inflation in the Eurozone, and the recent plunge in the Canadian dollar we are seeing a sustained bid for quality US debt. The Bank of Canada unexpectedly cut its overnight benchmark interest rate, and in response the value of the Canadian dollar plunged the most in over three years. Oil continues to remain lower which is a negative for energy companies, but could stimulate consumer spending and economic growth in the short/medium term. Moody's lowered Russia's credit rating to Baa3, and many fear that it will slip even further into junk bond territory.
   Yesterday, the 10-Year note sold-off -9 ticks, pushing yields up +3.4 bps to settle just above resistance at 1.887%. The coupon stack widened 1-2 ticks in the production coupons led by the 4.0/3.5 swap at +2 ticks. MBS outperformed treasury hedges by 3-7 ticks led by the 4.0% at +7.0 ticks tighter to the basis, short term Volatility declined -1.67 bps (3Mx10Y 84.33), and longer term Volatility declined -1.45 bps (5Yx10Y 86.14). The curve bull steepened, with 2s10s up +2.2 bps to 136.6, pulling the 20 day average to 140.7 vs. 144.9 prior. Long-end yields rose, pushing the 30-Year bond up +2.1 bps to 2.458%. Even with the 30-Year bond near all-time record lows, treasuries are still looking attractive vs. foreign debt. The 30-Year current coupon slipped to 2.60% vs. 2.61% prior, and the 15-Year fell -1.0 bps to 1.94 vs. 1.95% prior. 15/30 swaps lost 1-1.5 ticks in lower coupons, led by a 1.5 tick loss in the 2.5/3.0 swap. G2/FN rallied 2.0-6.0 ticks in the production coupons led by a +6.0 tick increase in the 3.5% coupon. The G2/FN 3.5% swap increased to 0-09 vs. 0-03 prior. Today, treasuries are sustaining yesterday's session highs in response to the European Central Bank's QE program, and the curve has bull flattened with 2s10s down -4.9 bps with yield on the 10-Year note hovering just above resistance at 1.827%.
Have A Nice Weekend!
Today's Events:
01/23 Existing Home Sales 07:00 December 5.08 Millions 5.04 Millions 4.93 Millions 4.92 Millions
01/23 Existing Home Sales MoM 07:00 December 3.0% 2.4% -6.1% -6.3%
01/23 Leading Index 07:00 December 0.4% 0.5% 0.6% 0.4%
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