- 4.5 MBS up 17 ticks at 100-08
- 10yr Tsy Yields down to 3.84
- "Rate sheet influential" MBS coupon yield spreads tighter
- Stocks off the highs but still positive at 1196.48 in the S&P
- Yes, it's a rally, but only into yield levels suggested after last week's 10yr auction.
Searching for the causality behind today's stellar performance in bonds has left even some smart folks guessing. Reasons offered include "end of the supply cycle," corporate issuance flooding marketplace late last week, ongoing uncertainty about the certainty of the Greek bailout, pre-earnings season jitters, and soon to follow dovish fed rhetoric . Then of course, there are the technicals which actually left me wondering why we didn't test 3.85 more aggressively last week in the first place.
Whatever the case, a rally is a rally, and we'll take it while we got it. Now... How long will that be?
Notice in the treasury chart above that there are two levels suggesting their own importance: 3.84 and 3.86. Yes, we're already through 3.86 at the moment, but it doesn't mean we won't be approaching it from both sides again in the near future. And in that future, we might draw on recent experiences showing that 3.86 has had a propensity to turn away all comers, at least on the first attack (seen in teal circles). And then, of course, 3.84 looks a bit more like "last call" both on the morning of the 8th as well as today's close.
Speaking of the morning of the 8th, recall that this was the extension of the bond-bullishness on the heals of the facemelter 10yr auction. Then recall that the 30yr auction wasn't any worse than average (in fact, a bit better, albeit at a slightly higher than bullish yield). Econ data wasn't especially out of the consensus range either, not enough to warrant a 4.00% 10yr note yield at least. With those things in mind, it's not that much of a stretch to consider a return to those "post 10yr auction" levels, especially if you're a bond market that's hoping for weakness in the stock market on less than stimulating earnings.
Going forward, it's important for us to remember that we are only now touching on some very logical technical levels in the 10yr yield, and that the nature of things going forward will very probably be more tied to econ data, Fed speak (short end of the yield curve affects levels in the long end), and earnings season performance. Weak earnings, subdued inflation, combined with dovish policy rhetoric 3.84-3.86 might be just the beginning of this week's bond rally. But failing that, at the very least, it looks like a good opportunity to start looking for lenders to price in these gains and "get back" those deals we thought were "lost forever" a week ago.
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