When last week's NFP hit, the massive rally of the day before was confirmed. Volume was as high as it has been in a long time on both days. As you can see in the chart below, most of the movement occurred on Thursday, whereas slightly more of the volume occurred on the Friday. Thursday was equivalent to the chips going down whereas Friday was like the cards being revealed that validated the placement of the chips. Validation...
The point I want to convey goes back to one of our recent commentaries, in which I said:
"the question of our continued enjoyment of low rates will be entirely dependent on any little (or big) piece of data that speaks to something seen to be at or near the core of the "problem." In other words, it's always likely that rates can remain low and stable to whatever extent tomorrows auction goes off better than expected..."
Maybe what I should have done a better job of saying is that the bond market has reached a certain level that requires more defense than previous levels. If 10 kids are trying to be king of the hill, whoever has the title at the time has 9 enemies to worry about as opposed to 1. Another analogy? A jet fighter must consumer exponentially more fuel for a linear increase in speed as it approaches the upper limits of its capabilities.
It's the same thing for bonds... The higher we've come and the faster we got there, the more edification required for us to stay there. The 30 minute chart shows another example of volume spikes always rising only to support previous zones, but doing little to help us push higher:
And so it is that a 3+ bid-to-cover on a 10yr auction that stopped within one bp of WI never even cracks the median yield from the auction on the day. Either more time without refutation or additional bullish data are required to make additional gains at these levels.
PLAIN AND SIMPLE:
The highest yield bid accepted at today's 10yr auction was not even 0.01 higher than the price at which the 10yr had been trading before the auction. Additionally, although the 10yr did rally, it didn't rally enough to see yields drop to the same level as the average bid accepted at today's auction. This is somewhat uncommon. In most cases--especially following a period of more "middle of the road" performance, it's quite common to see a coupon trading around the median yield from a recent auction at some point in the day of the auction. It's simple the manifestation of the difficulty with which bonds attempt to push lower in yield so quickly after the already aggressive drop experienced in recent weeks and months.
Recall the median yield was 3.16 and here's the day's trading:
Just looking at the intraday charts might create a feeling that borders on insult. Hopefully everything we've discussed up to this point helps soften that sentiment a bit. It's one thing to SAY that bonds and MBS have rallied fairly aggressively for weeks and months despite a rallying stock market. It's another thing to see it. And though it's a bit more noticeable in the MBS chart than in the tsy chart, movements indeed look so bullish that the MBS price movements almost look out of place and perhaps even a bit tenuous:
Look, I don't know if they're tenuous or not... If bond market fundamentals and auction results are an indication, they're anything but tenuous. But we'll continue to be subject to ongoing developments of earnings season on a small scale and the overall sentiment on the recovery on the larger scale. All I know is that we can all breathe our biggest sigh of relief all year now that ALCOA earnings are out and we didn't experience a late day 5 point sell off! *
Between weekly data, fed speak, and the bond auction, tomorrow is a ridiculous data blast:
Tomorrow:
- Jobless Claims
- Wholesale Trade
- Fed's Kohn at 12:15
- 30yr bond auction at 1pm
- Fed speak from lacker at 1:15
- Tarullo at 335
- standard weekly reading on Fed MBS purchasing around 430 (moving target though)
- Money supply
- Bernanke after the close
- Hoenig even later!
* disclaimer: we don't really care about ALCOA earnings, it's an inside joke for a large portion of our audience...
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