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Market Commentary

Market Commentary

January 26, 2015
10-YEAR NOTES   103-31.5 (-01)
FN 3.5% COUPON   105-06.5 (+00.5)
SUPPORT   2.40%
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   We have a full data calendar ahead this week, with the main focus on Wednesday's FOMC Statement and Friday's 4Q advanced GDP release (consensus 3.0%). This week we get data on Manufacturing, Durable Goods, Home Prices, Home Sales, GDP and the FOMC releases their latest rate decision. The key for this week's FOMC release will be to see how the Fed alters the wording of the "patience" statement in light of continued global economic declines, persistent slack in U.S. inflation, and the downward trend in labor force participation. As usual, we also look for any hints as to when the fed will decide to raise interest rates. The Dallas Fed general business activity index fell to 4.1 in December vs. 10.5 prior, and for January expectations are for another decline to 3.0.
   Treasuries got a boost last week as the European Central Bank (ECB) President Mario Draghi announced the launch of 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 light of the ECB's QE program, the dollar has climbed to an 11-Year high vs. the Euro on increased demand for U.S. assets. On Sunday an anti-austerity party won the Greek elections causing a sharp decline in Greek bonds, with their 3-Year yield rising +166 bps to 11.73%. In response to the news the U.S. 30-Year bond reached a record low yield of 2.33% and German 10-Year yields raised +2 bps to 0.38%, European stocks advanced +0.2% (Stoxx Europe 600), and Oil rose +0.9% to $45.98 a barrel. Even with this weekend's increase in oil prices it continues to remain low, which may stimulate consumer spending and economic growth in the short/medium term. Fighting in Ukraine continues to spread, causing the ruble to tumble an additional -2.3%. Russia's credit rating continues to hover near junk at Baa3, and S&P may announce the results of its unscheduled rating review of Russia by Friday. MBS rebounded last week as rates stabilized and volatility declined.
   On Friday, the 10-Year note rallied +23 ticks, pulling yields down -8.1 bps to touch just above resistance at 1.809%. The coupon stack tightened 0.5-4 ticks in the production coupons led by the 3.5/3.0 swap at -4 ticks. MBS underperformed treasury hedges by 1-4.5 ticks led by the 3.0% at -4.5 ticks tighter to the basis, short term Volatility increased +1.23 bps (3Mx10Y 85.83), and longer term Volatility declined -0.17 bps (5Yx10Y 86.01). The curve bull flattened, with 2s10s down -5.6 bps to 131.0, pulling the 20 day average to 139.6 vs. 148.3 prior. Long-end yields fell, pulling the 30-Year bond down -18.5 bps to 2.383%. Even with the 30-Year bond near all-time record low yields, treasuries are still looking attractive vs. lower returns with foreign debt. The 30-Year current coupon fell to 2.56% vs. 2.61% prior, and the 15-Year fell -4.0 bps to 1.91 vs. 1.95% prior. 15/30 swaps lost 2-5 ticks in the belly coupons, led by a 5.0 tick loss in the 2.5/3.0 swap. G2/FN compressed 2.0-4.5 ticks in the production coupons led by a -4.5 tick decrease in the 3.5% coupon. The G2/FN 3.5% swap declined to 0-05.5 vs. 0-09 prior. Treasuries are mixed this morning in response to the anti-Euro Syriza party winning the Greek election yesterday, and the curve has bear flattened with 2s10s down -2.7 bps with yield on the 10-Year note hovering just above resistance at 1.809%.
This Week's Events:
01/26 Dallas Fed Manufacturing Activity 07:30 January 3.00 - 4.10 -
01/27 Durable Goods Orders 05:30 December 0.40% - -0.70% -0.90%
01/27 S&P/Case-Shiller US Home Price Index MoM 06:00 November 0.70% - 0.65% -
01/27 S&P/Case-Shiller US Home Price Index YoY 06:00 November 4.60% - 4.64% -
01/27 New Home Sales MoM 07:00 December 2.70% - -1.60% -
01/27 New Home Sales 07:00 December 450K - 438K -
01/28 MBA Mortgage Applications 04:00 January 23 - - 14.2% -
01/28 FOMC Rate Decision 11:00 January 28 0.25% - 0.25% -
01/29 Jobless Claims 05:30 January 24 300K - 307K -
01/29 Continuing Claims 05:30 January 17 2405K - 2443K -
01/29 Pending Home Sales MoM 07:00 December 0.50% - 0.80% -
01/30 GDP Annualized QoQ 05:30 4Q A 3.00% - 5.00% -
01/30 Personal Consumption 05:30 4Q A 4.00% - 3.20% -
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