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Market Commentary

Market Commentary

February 05, 2015
10-YEAR NOTES   103-31 (-15.5)
FN 3.5% COUPON   105-09 (-04.5)
SUPPORT   2.40%
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 The number of Americans filing for unemployment benefits for the week ended January 31st bounced back from 14-Year lows to 278K vs. 265K prior (consensus 290K) and Continuing Claims posted in-line with expectations at 2400K vs. 2385K prior. The trade deficit widened considerably in December, up +17.1% to the highest level since 2012. The goods and services deficit was $46.6 Billion in December, up +$6.8 Billion from $39.8 Billion in November (revised up from $39.0 Billion). A strong dollar, declining oil prices, and global economic weakness are hampering Exports and supporting Imports. Exports for December were down -0.8% to $194.9 Billion vs. $196.4 Billion prior and Imports were up +2.2% to $241.4 Billion vs. $236.1 Billion prior. December’s deficit expansion reflected an increase in the goods deficit of +$6.9 Billion to $66.0 Billion and an increase in the services surplus of +$0.1 Billion to $19.5 Billion. Nonfarm productivity growth for the fourth quarter (Q4) of 2014 declined - 1.8%, after jumping +3.7% in Q3 (consensus +0.1%) and Unit labor costs increased +2.7% after declining -2.3%.
   Weakness in the global economy continues to drive demand for U.S. safe haven assets and support treasuries. The dollar rose from 93.6 to 94.25, adding strength to last month’s +3.3% advance. The S&P fell -12 points to 2030.10 yesterday adding to last week’s -2.8% loss. Declining Oil prices and wage pressures in the refinery sector have led to the biggest strike at U.S. refineries since 1980; the strike accounts for approximately 10% of the nation’s capacity as refinery workers seek to double annual pay increases to +6%. West Texas Intermediate (WTI) futures fell back below $50 per barrel yesterday to $48.84 vs. $53.05 prior, reversing five consecutive days of gains. The Euro edged up +0.77% yesterday, to 1.1432 Euro per dollar and the Stoxx Europe 600 Index increased +0.5% to 372.1. Greece’s bonds advanced, modestly, yesterday pushing ten-year rates to 9.678% vs. 9.516% prior as the newly elected leaders attempt to renegotiate the nation’s debt obligations. The ruble strengthened yesterday advancing from 65.22 to 68.19 per dollar.
   Yesterday, the 10-Year note recovered some ground from the prior day’s 31 ticks loss, up 12.25 ticks, which pulled yields down -4.2 bps to 1.741%. The coupon stack compressed 0.5-1.25 ticks in the production coupons led by the 3.0/2.5 swap, down -1.25 ticks. MBS underperformed treasury hedges by 1.5-4.5 ticks led by the 3.0% at -4.5 ticks wider to the basis. Short term Volatility fell -1.63 bps (3Mx10Y 88.37), and longer term Volatility fell -0.17 bps (5Yx10Y 86.48). The curve bull flattened, with 2s10s down -1.9 bps to 126.1, pulling the 20 day average to 131.5 vs. 136.9 prior. Long-end yields fell, pulling the 30-Year bond down -3.4 bps to 2.340%. 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 declined, down -1.0 bps to 2.52% vs. 2.53% prior, and the 15-Year ended the day unchanged at 1.84%. 15/30 swaps lost 1.0-1.5 ticks led by the 3.5/4.0 swap at -1.5 ticks. G2/FNs lost 1.0-2.5 ticks led by a -2.5 tick drop in the 3.5% coupon. The G2/FN 3.5% swap declined to -3.5 ticks vs. -1.0 tick prior. This morning treasuries are selling off and bear steepening persists with 2s10s up +0.5 bps and yield on the 10-Year note at 1.805%.
This Week's Events:
02/05 Jobless Claims 05:30 January 31 290K 278K 265K 267K
02/05 Continuing Claims 05:30 January 24 2400K 2400K 2385K 2394K
02/05 Trade Balance 05:30 December -$38.0 Billion -$46.6 Billion -$39.0 Billion -$39.8 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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