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Market Commentary

Market Commentary

January 27, 2015
10-YEAR NOTES   104-11 (+18)
FN 3.5% COUPON   105-07.5 (+05.5)
SUPPORT   2.40%
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   Today the FOMC meeting begins, and tomorrow the Fed releases their announcement. Durable Goods Orders rose +0.3% in October, dipped -0.9% in November and sank sharply in December, down -3.4% (consensus +0.3%). Durable Goods Orders have been in decline for four of the past five months. Excluding transportation, the core fell -1.2% in October, -0.7% in November and continued to decline in December, down -0.8% (consensus +0.6%). The drop in Durable Goods Orders reflects a -9.2% dip in transportation, a -55.5% plummet in non-defense aircrafts, and -19.9% drop in defense aircrafts. The S&P/Case-Shiller 20-city home price index rose 4.8% in September, +4.5% in October and edged up +0.7% in November. New home sales came in lower than expected in November, down -1.6%, and expectations for December are for a +2.7% boost. The Consumer Confidence index rose +1.6 points in December to 92.6, and expectations for January are for another rise to 95.5.
     Treasuries have sustained last week's levels following the ECB's announcement of a 1.14 trillion Euro stimulus plan including 60 Billion Euros a month in asset purchases from March to September of next year. 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. Greek bonds continue to sink lower for a second straight day as the new anti-austerity party Syriza takes office. Greek 3-Year yields raised +197 bps to 14.01%, after jumping +197 bps the prior day, and yields on their 10-Year increased +38 bps to 9.48%. Crude Oil remains low at $45.36 per barrel which may stimulate consumer spending and economic growth in the short/medium term. The ruble continues to slide to record lows after Standard & Poor downgraded Russia's bond rating to junk; Russia was lowered one step to BB+, putting it below investment grade for the first time in 10 years. The currency declined as much as -6.2% vs. the dollar after the S&P announcement. Moody's rating of Russian bonds remains one step above the S&P's at the lowest investment grade.
    Yesterday, the 10-Year note sold-off -2.5 ticks, pushing yields up +0.8 bps to end above resistance at 1.824%. The coupon stack widened 0.5-1 tick in the production coupons led by the 4.0/3.5 swap at -1 tick. MBS underperformed treasury hedges by 1.0-3.0 ticks led by the 4.5% at -3.0 ticks wider to the basis. Short term Volatility declined -2.44 bps (3Mx10Y 83.93), and longer term Volatility declined -1.30 bps (5Yx10Y 84.88). The curve bull flattened, with 2s10s down -1.2 bps to 130.7, pulling the 20 day average to 138.6 vs. 146.5 prior. Long-end yields rose, pushing the 30-Year bond up +0.1 bps to 2.547%. Even with the 30-Year bond near all-time record low yields treasuries are still looking attractive vs. lower, and sometimes negative, returns with foreign debt. The 30-Year current coupon rose +2 bps to 2.59% vs. 2.57% prior, and the 15-Year rose +3.0 bps to 1.93 vs. 1.90% prior. 15/30 swaps lost 1-3 ticks in the belly coupons, led by a 3.0 tick loss in the 4.0/4.5 swap. G2/FNs compressed 1.0-2.0 ticks in the production coupons led by a -2.0 tick decrease in the 4.0% coupon. The G2/FN 3.5% swap declined to 0-04 vs. 0-05.5 prior. Treasuries rallied this morning in response to the disappointing Durable Goods Orders data, pulling the 30-Year bond yield to a record low of 2.34% and the 10-Year note lost -7.4 bps. The curve has bull flattened with 2s10s down -2.7 bps with yield on the 10-Year note just below resistance at 1.763%.
This Week's Events:
01/27 Durable Goods Orders 05:30 December 0.30% -3.40% -0.70% -2.10%
01/27 S&P/Case-Shiller US Home Price Index MoM 06:00 November 0.70% 0.76% 0.65% 0.69%
01/27 S&P/Case-Shiller US Home Price Index YoY 06:00 November 4.65% 4.69% 4.64% 4.63%
01/27 New Home Sales MoM 07:00 December 2.70% 11.60% -1.60% -6.70%
01/27 New Home Sales 07:00 December 450K 481K 438K 431K
01/28 MBA Mortgage Applications 04:00 January 23 - - 14.20% -
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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