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Market Commentary

Market Commentary

January 29, 2015
10-YEAR NOTES   104-00 (+07)
FN 3.5% COUPON   105-06 (+03)
SUPPORT   2.40%
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   Jobless Claims for the week ended January 24th showed that the lowest number of Americans filed for unemployment benefits since 2001. Initial Jobless Claims fell to 265K and the prior week's was revised up from 307K to 308K (consensus 300K). Continuing Claims also declined to 2385K and the prior was revised up from 2443K to 2456K (consensus 2405K). The Jobless Claims and Continuing claims data fit with the description of an improving economy released by the FOMC yesterday. Pending Home Sales picked up in November, up +0.8%, and expectations for December are for another +0.5% gain.
  Yesterday the FOMC released their statement regarding the current state of the economy and their policy decision on short term interest rates. January's statement maintained that the FOMC "expects inflation to rise gradually toward 2% as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate". At future meetings the Fed faces a difficult decision in attempting to raise rates in an environment with no inflation growth, stagnant wage growth, a declining labor force participation rate, falling energy prices and global economic declines. If the Fed raises rates too soon, without inflation/wage growth, they risk sending the economy into deflation. The Fed maintained the "patient" clause: "Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy". While the Fed kept the statement largely the same as December's release, they voiced concerns over the current U.S. inflation outlook, acknowledged global economic risks, and removed the "considerable time" language.
   Treasuries continue to be elevated from last week's 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. European stocks continued to decline yesterday with the Stoxx Europe 600 Index down -0.4%. In response, the dollar has climbed to an 11-Year high vs. the Euro on increased demand for U.S. assets. The U.S. Dollar Index rose to the highest since September 2003 yesterday, adding further to this year's 4% increase. Another factor that boosted treasuries throughout the day was the Durable Goods Orders miss which gave the Fed a little more to digest at yesterday's meeting. Gold gained +0.9% on the disappointing Durable Goods data. Greek bonds continued to sink lower, for a third consecutive day, following the election of the anti-austerity party Syriza. Greece's three-year rate jumped +183 bps to 15.86% and the yield on 10-Year securities rose +69 bps to 10.16%. Crude Oil fell yesterday to $44.50 per barrel, and continues to remain low, which should stimulate consumer spending and economic growth in the short/medium term as many are paying less at the pump. Oil slid nearly 50% last year as the U.S. pumped at the fastest pace in over three 30 years and the average cost of a gallon of regular gasoline was $2.04 yesterday, down from $3.68 in late June (AAA). The ruble continues to slide lower 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 ruble fell -0.8% yesterday to 67.3570 per dollar. Moody's rating of Russian bonds remains one step above the S&P's at the lowest investment grade.
   Yesterday the 10-Year note rallied +31.0 ticks, pulling yields down -10.6 bps to break through resistance at 1.720%. The coupon stack compressed 2.0-5.5 ticks in the production coupons led by the 4.0/3.5 swap, down -5.5 ticks. MBS underperformed treasury hedges by 2.0-5.0 ticks led by the 3.0% at +5.0 ticks tighter to the basis. Short term Volatility fell -0.92 bps (3Mx10Y 83.33), and longer term Volatility declined -0.17 bps (5Yx10Y 84.88). The curve bull flattened, with 2s10s down -5.9 bps to 125.2, pulling the 20 day average to 136.4 vs. 147.6 prior. Long-end yields fell, pulling the 30-Year bond down -11.2 bps to 2.291%. Even with the 30-Year bond near all-time record low yields treasuries are still looking attractive vs. lower, and some negative, returns with foreign debt. The 30-Year current coupon fell -8.0 bps to 2.50% vs. 2.58% prior, and the 15-Year fell -4.0 bps to 1.87% vs. 1.91% prior. 15/30 swaps lost 1.0-2 ticks in the belly coupons, led by a -2.0 tick decline in the 3.0/3.5 swap. G2/FNs compressed 2.0-6.0 ticks in the production coupons led by a -6.0 tick decrease in the 4.0% coupon. The G2/FN 3.5% swap declined into the negative at -0-01.5 vs. 0-02.625 prior. Treasuries reversed two days of gains this morning in response to the much better than expected Claims data, pushing the 30-Year bond yield to 2.320% and the 10-Year note gained +3.6 bps. The curve has bear steepened with 2s10s up +2.7 bps with yield on the 10-Year note just below resistance at 1.757%. Tomorrow GDP is expected to show that the economy grew 3.1% in the fourth quarter of 2014 following the prior quarter's 5% growth rate (strongest in a decade).
Double Auction Day:
There is a 5-Year Note Auction at 8:30 AM (PST) and a 7-Year Note Auction at 10:00 AM (PST).
This Week's Events:
01/29 Jobless Claims 05:30 January 24 300K 265K 307K 308K
01/29 Continuing Claims 05:30 January 17 2405K 2385K 2443K 2456K
01/29 Pending Home Sales MoM 07:00 December 0.50% -3.70% 0.80% 0.60%
01/30 GDP Annualized QoQ 05:30 4Q A 3.10% - 5.00% -
01/30 Personal Consumption 05:30 4Q A 4.00% - 3.20% -
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