Good Afternoon All.
In NASCAR the GREEN flag signals the start or resumption of the race. A GREEN flag tells drivers to floor it! In the bond market, GREEN on the board means lower rates and higher prices. Today GREEN on the board had NASCARish effects on the rates market.
To keep it simple...following the successful 10yr note auction, the TSY market benefited from a wave of new trades which pushed prices higher and yields lower. Volume accumulated as new positions were added...all while prices ticked up and the yield curve flattened. Buying beget more buying...traders didnt want to miss the rally boat!
GREEN GREEN GREEN GREEN GREEN
The 10yr TSY note is +20/32 at 103-22 yielding 3.18%. The FN 4.0 is +10/32 at 99-23 yielding 4.035% and the FN 4.5 is +9/32 at 101-29 yielding 4.2657%. The secondary market current coupon is 4.081%.
CC vs. 5yr TSYs: +191bps (wider), CC vs. 10yr TSYs: +89bps (wider),CC vs. 10yr SWAP: +72bps (wider). Rate sheet influential MBS coupons are having a hard time keeping up with the rest of the rates market rally....
Looking at the DEC 10YR FUTURES CONTRACT...you can see how trading volume accumulated even as prices continued to tick higher. The results of the 1pm 10yr TSY auction pushed prices to new intraday highs, then to new intraday highs again, and then to another intraday high. Buyers had/still have control...
Today's reversal of recent bearishness in the bond market (bc of a lack of data and supply) combined with the speculative bull flattener trades we saw being placed ahead of the 30yr bond auction tomorrow implies there may be more rally to come. How much more? If data/events are supportive of a rally extension, one would have to assume last week's pre-NFP yield levels are prospective profit taking targets. This would push the 10yr down to 3.09-3.10...
Dont miss the important part of that last statement...IF DATA/EVENTS ARE SUPPORTIVE. Notice the 10yr failed to break 3.17%??? While trade flows are indicative of "more rally to come"...the market loves to prove as many wrong as possible. The rally stall at 3.17% illustrates a "wait for further confirmation" outlook...more specifically...ITS EARNINGS SEASON!!!
Remember what happened during the last earnings season?
AN MBS RALLY LOST MOMENTUM!!! The FN 4.5 fell from 101-00 to 98-10 during Q2 earnings season...
So while today's trade flows are indicative of "more rally to come"...the stock lever has not been so friendly to MBS during earnings season. Just a thought...
PS: We should also be talking about the value of the dollar and the BIG PICTURE implications for the rates market...we'll save that for later though. I am done for the day...everyone have a good night.
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