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Market Commentary


Tuesday
February 03, 2015
10-YEAR NOTES   104-18.5 (-21.5)
1.740%
FN 3.5% COUPON   105-17.5 (-04.5)
SUPPORT   2.40%
RESISTANCE   1.62%
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   We have a light calendar today with Factory Orders as today’s only headline ahead of tomorrow’s ADP release. Factory Orders have been in decline for the past four consecutive months. In November Orders were down -0.7% with durable goods down -0.9%, non-durable goods down -0.5%, transportation down -1.3%, and non-defense capital goods edged into the positive at +0.1%. Factory Orders for December declined more than anticipated, down by $8.1 Billion or -3.4% vs. consensus of -2.4%. December’s decline was led by a large move downward in transportation, down -9.2%.
 
   U.S. Treasuries remain elevated as global economic weakness continues to provide increased demand for safer U.S. assets. The dollar reversed three consecutive days of gains yesterday to end the day down -0.3%; the Index rallied +3.3% in January. Yesterday’s declining dollar is a signal that the global economic slowdown is restricting U.S. growth. The S&P rose +0.4% after falling -2.8% last week. The recent decline in Crude Oil prices and related layoffs in the processing sector have led to the biggest strike at U.S. refineries since 1980 adding to investors belief that the strike may curtail production and worsen the global oversupply. The strike at U.S. refineries accounts for approximately 10% of the nation’s capacity. West Texas Intermediate (WTI) futures advanced yesterday, for the fourth consecutive day of gains, up +1.21% to $49.45 per barrel amid speculation that production may suffer. Gasoline for March delivery advanced to $1.5296 a gallon. European stocks erased losses of -0.8% throughout the day to end nearly flat to the prior day’s close; the Stoxx Europe 600 Index advanced +0.1%. The Euro gained +0.5% yesterday to $1.1342 Euro per dollar. Greece’s yields continue to decline as the newly elected leaders start touring to gather supporters for a new debt deal. Greece’s 10-Year yield fell -105 bps to 9.90% for the largest decline since 2012. The ruble continues to grind lower for a fifth straight day after the bank’s surprise 200 bps rate cut and Moody's/S&P cut Russia’s investment rating; the Ruble declined -1.53% to 68.405 vs. the dollar yesterday.
 
    Yesterday, the 10-Year note continued the prior days rally, albeit modestly, with a +01 tick advance which pulled yields down -0.3 bps to 1.670%. The coupon stack widened 0.05-1.5 ticks in the production coupons led by the 3.0/2.5 swap, up +1.5 ticks. MBS outperformed treasury hedges by 0.5-1.5 ticks led by the 4.0% at 1.5 ticks tighter to the basis. Short term Volatility fell -0.12 bps (3Mx10Y 86.58), and longer term Volatility fell -0.17 bps (5Yx10Y 85.06). The curve bull flattened, with 2s10s down -0.4 bps to 119.9, pulling the 20 day average to 132.3 vs. 144.7 prior. Long-end yields fell, pulling the 30-Year bond down -0.6 bps to 2.248%. 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 increased +2.0 bps to 2.47% vs. 2.45% prior, and the 15-Year was unchanged at 1.80%. 15/30 swaps lost 1.0-1.25 ticks in the production coupons led by the 3.5/4.0 swap at -1.25 ticks. G2/FNs declined 1.0-2.5 ticks led by a 2.5 tick drop in the 3.5% coupon. The G2/FN 3.5% swap fell to -4 ticks vs. -1.5 ticks prior. Treasuries coming off their highs this morning and the curve has bear steepened with 2s10s up +4.9 bps and yield on the 10-Year note above resistance at 1.740%.
 
This Week's Events:
 
DATE EVENTS TIME (PST) PERIOD SURVEY ACTUAL PRIOR REVISED
02/03 Factory Orders 07:00 December -2.4% -3.4% -0.7% -1.7%
02/04 MBA Mortgage Applications 04:00 January 30 - - -3.2% -
02/04 ADP Employment Change 05:15 January 220K - 241K -
02/04 ISM Non-Manufacturing Composite 07:00 January 56.4 - 56.2 56.5
02/05 Jobless Claims 05:30 January 31 290K - 265K -
02/05 Continuing Claims 05:30 January 24 2400K - 2385K -
02/05 Trade Balance 05:30 December -$38.0 Billion - -$39.0 Billion  
02/06 Nonfarm Payrolls 05:30 January 230K - 252K -
02/06 Unemployment Rate 05:30 January 5.6% - 5.6% -
 
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