Good Morning. Happy Last Day of 2010.
Overnight trading in the Treasury market was slower than usual as Japan enjoyed an exchange holiday and the rest of the world prepared for a new year. And by slower than usual I mean it was the slowest day of the week which was the slowest week of the year.
Size doesn't matter this morning though. We're just happy to see green flashing lights and appreciating bond prices on our screens. The 10 year TSY note rally got going on Wednesday afternoon after a strong 7-year note auction, was defended yesterday, and extended overnight as Londoners plugged back in and readied for the last session of 2010.
The 2.625% coupon bearing 10 year Treasury note is currently +8/32 at 94-02 yielding 3.336% and already went as low as 3.315% this morning. 42k 10yr contracts have traded on Globex as of 9AM. This is laughable. But again, size doesn't matter much to us at the moment as we're more concerned about prepping our bodies for late night festivities that do not include driving a car or operating any heavy machinery.
(OOOOooooo we're so close to hitting our year-end 3.31% target in 10s. Sssshhhh no one mention it. I don't want to spook the yellow line on my chart)
The modest bid in TSYs combined with month-end extension needs (ugh. forced needs) will likely support tighter valuations in MBS land this AM. Trading desks reported an unexpectedly low turnout for duration yesterday thus we would anticipate some sort of buying activity today to accommodate longer hedge ratios. Once again, size won't matter much as even a meager directional bid will support lower rates in this extremely quiet trading environment. But I've painted a pretty positive picture thus far but should remind readers that a lack of liquidity has its up sides as well as its down sides. In this case we should be nervous about profit taking into higher TSY prices. Be mindful of the fact that attention is otherwise diverted at the moment and any chunky sell tickets could lead to a gappy jump higher in yields. Thus if you are making a lock/float decision today....keep your finger close to the trigger.
Currently the Fannie Mae 4.5 MBS coupon is +6/32 at 102-11 and the FNCL 4.0 is +11/32 at 99-09. Those two coupons are converging in yield. 4.0s look cheap vs. 4.5s. Hint Hint month end index extension buyers.
Key Events in the Day Ahead...
None. No Econ Data. No Treasury Auctions. No Fed QEII Coupon Lifts.
THE MARKET CLOSES AT 2PM.
ps....Is today the last day of the decade or was that last year?