Good Morning.
An essentially empty econ calendar made it easy for rates traders to price in a pre-auction concession last week. The corresponding effect was higher benchmark yields and steeper yield curve (more expensive funding for TSY too!). However, healthy demand was seen taking down the debt and the pre-auction concession was pretty much price back out of the curve...leaving us almost flat on the week.
Below is the week over week for the 3.625% coupon bearing 10 year note. On Monday morning, 10s were yielding 3.696%, moved as high as 3.779% over the course of the week, then fell back to 3.703% by Friday afternoon. Status quo was restored after the auctions.
On Friday afternoon, the FN 4.0 was +0-01 at 97-28 yielding 4.208% and the FN 4.5 was +0-00 at 100-28 yielding 4.402%. The secondary market current coupon was 4.344%. The current coupon yield was 64.1 basis points over the 10 year TSY note yield and 59.5 bps over the 10 year swap rate.
"Rate sheet influential" mortgages performed well against benchmark Treasuries for most of the week, at least until before getting their butt whipped on Friday. Overall, the FN 4.5 was down 7 ticks (0-07 or 7/32) on the week.
In terms of yield, the secondary market current coupon yield was 3 basis points higher on the week...compare that to the relatively unchanged 10 year TSY note yield.
The Week Ahead is quite busy with a one day FOMC meeting (usually two days), industrial production data, housing stats, a couple inflation reads, leading indicators, and the release of TSY debt supply terms (2s/5s/7s on Thursday). On the political side, financial reform will be a topic of great discussion as well as more debate on health care.
To start the week...
The SHANGHAI closed down 1.21%, the HANG SENG was 0.62% lower, the TOPIX ended the session +0.27%, the NIKKEI was flat. The CAC is currently -0.25% in Paris, the DAX is +0.02% in Frankfurt, and the FTSE is 0.12% lower in London.
There is a ton to discuss so I am going to buzz through it and direct you to a few stories.
1. Over the weekend, Chinese Premier Wen Jiabao made a statement that the "Chinese currency is not undervalued".
Paul Krugman wrote on the subject. Here are a few comments to bring you up to speed: "Widespread complaints that China was manipulating its currency — selling renminbi and buying foreign currencies, so as to keep the renminbi weak and China’s exports artificially competitive — began around 2003. At that point China was adding about $10 billion a month to its reserves, and in 2003 it ran an overall surplus on its current account — a broad measure of the trade balance — of $46 billion" READ HIS POST
2. Moody's is going to warn on the U.S triple-A credit rating.
From the FT: Examining the administration’s outlook for the federal budget deficit, the agency said: “If such a trajectory were to materialise, there would at some point be downward pressure on the triple A rating of the federal government.”
Come on Moody's...seriously? Again we're discussing this? I suppose its not reality that matters most, its the perception of reality that matters most. The US will not default on government debt.
3. Empire State Manufacturing data has been released. The market was expecting 22.0 it got 22.86...basically on the screws. The Fed has also published the G.17 Industrial Production report. Industrial Output rose by 0.1% vs. estimates for no change. Leading the way into the green was the mining industry with a 2.0% gain. Capacity Utilization was up 0.2% from 72.5% to 72.7%. The Fed says this data was affected by the snow storms....yet it was still better than expected. READ MORE
I should also discuss TIC data but I will save that for MBS MORNING.
The 3.625% 10 year note hasn't made much progress from Friday's "going out" levels. The 3.625% coupon bearing 10 year note is currently -0-03 at 99-08 yielding 3.716%. The post-auction rally is still in place...3.72% is support.
The FN 4.5 is currently -0-01 at 100-27 yielding 4.406%. The secondary market current coupon is 4.347%. The current coupon yield is 62.9 basis points over the 10 year note yield and 59.5 bps over the 10 yr swap rate. After a considerable amount of spreads widening on Friday, rate sheet influential yield spreads are tighter to start the week.
Until 10s make a move, the FN 4.5 will likely hold to the recent range with 101-00 seen as a psychological profit taking point while 100-24 serves as support. 100-28 is our mid-range pivot. Regarding 10s, much will be dependent on the verbiage and tone used by the FOMC. Technically, the 10 year note is due to test the strength of a rebound rally. However, market participants, while still nervous for a double-dip, know the Fed is slowly inching its way toward the exits in all facets of "accommodative" policy...this puts pressure on the entire yield curve (more so on the short end, indirectly on the long end). Again, the verbiage and tone of the FOMC has great potential to move money. I anticipate the hours ahead of the FOMC statement (on Tuesday, not Wednesday this time) will keep trade flows thin and sentiment mixed. Given these conditions, there is the possibility for some tapebomb induced price chopatility...that anxiety applies to data releases as well. Other than that, the range trade is in motion....at least until 2:15 tomorrow afternoon.
REPRICES FOR THE BETTER AT 101-04. REPRICES FOR THE WORSE AT 100-20
Rebate is close to the same as Friday with a few lenders slightly worse and few better. 15 year pricing should be improved
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