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Market Commentary


Friday
January 30, 2015
10-YEAR NOTES   105-02.5 (+20)
1.686%
FN 3.5% COUPON   105-19 (+07)
SUPPORT   2.40%
RESISTANCE   1.62%
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   Real Gross Domestic Product (GDP) increased less than economists forecast in the fourth quarter advanced estimate, adding to speculation that the Fed may refrain from interest rate hikes for longer. In the fourth quarter of 2014 GDP grew +2.6% (consensus +3.0%) following a +5.0% jump in the third quarter; for all of 2014 GDP grew +2.4%. The fourth quarter's growth reflects positive contributions from: Personal Consumption Expenditures (+4.3% vs. 3.2% prior), Exports (+2.8%), nonresidential fixed investment (+1.9%), state and local government spending (+1.3%), and residential fixed investment (+4.1%). Real Imports of goods and services increased +8.9%, thus widening the trade deficit to 471.5 as Imports increased three times faster than exports; the strong dollar (current DXY +0.10%) may continue to add impetus to the Import/Export imbalance. The Employment Cost Index rose in-line with consensus at +0.6% in the fourth quarter vs. 0.7% prior. In reaction to the GDP miss S&P 500 futures fell -0.9% and Gold rose +0.5%.
 
   U.S. Treasuries continue to be elevated following 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 -0.5%. The U.S. Dollar Index rose +0.6% on the day, for the strongest dollar in a decade, and Gold lost -2.1% on speculation that the Fed is the only developed nation's central bank considering raising rates this year. Crude Oil fell yesterday to $43.78 per barrel (West Texas), the lowest level since 2008. Oil slid nearly 50% last year as the U.S. pumped at the fastest pace in over three 30 Years giving consumers more savings at the pump which should add momentum to consumer spending. Greek bonds were mixed yesterday, with yields falling in their 10-Year and rising in the 3-Year, amid speculation that the new anti-austerity party will be unable to take control of the Greek economy. Greece's three-year rate climbed +53 bps to 17.26% and the yield on 10-Year securities fell -17 bps to 10.17%. The ruble continues to grind to new lows following a surprise interest rate cut of -200 bps to 15%; the currency fell -4.3% to 71.8465 vs. the 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 reversed the prior days +31 tick rally and sold-off -12.5 ticks pushing yields up +4.3 bps to 1.762%. The coupon stack widened 1.0-1.5 ticks in the production coupons led by the 4.0/3.5 swap, up +1.5 ticks. MBS outperformed treasury hedges by 2.0-3.0 ticks led by the 3.0% at +3.0 ticks tighter to the basis. Short term Volatility fell -0.54 bps (3Mx10Y 83.33), and longer term Volatility declined -0.17 bps (5Yx10Y 84.88). The curve bear steepened, with 2s10s up +2.6 bps to 124.1, pulling the 20 day average to 135.1 vs. 146.1 prior. Long-end yields rose, pushing the 30-Year bond up +3.3 bps to 2.328%. 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 rose +3.0 bps to 2.53% vs. 2.50% prior, and the 15-Year rose +2.0 bps to 1.88% vs. 1.86% prior. 15/30 swaps gained 1.0-3.0 ticks in the lower coupons, led by a +3.0 tick increase in the 2.5/3.0 swap and the higher coupons widened led by the 4.0/4.5 swap at -3.5 ticks. G2/FNs increased 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 returned from negative territory at +0-0.125 vs. -0-01.5 prior. Treasuries have recovered yesterday's losses in response to the GDP miss: 10-Year notes fell -6 bps to the lowest level since May 2013 and the 30-Year bond yield to fell to 2.255%. The curve has bull flattened with 2s10s down -3.0 bps with yield on the 10-Year note just above resistance at 1.686%.
 
Have a Great Weekend Everyone!
 
Today's Events:
 
DATE EVENTS TIME (PST) PERIOD SURVEY ACTUAL PRIOR REVISED
01/30 GDP Annualized QoQ 05:30 4Q A 3.00% 2.60% 5.00% -
01/30 Personal Consumption 05:30 4Q A 4.00% 4.30% 3.20% -
 
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