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Bond Markets Steady Near Yesterday's Best Levels
Posted to: Micro News
Friday, December 28, 2012 9:41 AM

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Two day charts do an exceptional job of conveying the most relevant trading themes surrounding the Fiscal Cliff. Yesterday afternoon's slow, steady improvements offered up a "pitch" for any positive Fiscal Cliff headline. Just before 3pm, a batter stepped up to the plate and made contact. News that Congress would reconvene on Sunday evening at 6:30pm was construed as a solid base-hit as stock prices and bond yields rose fairly quickly.

Almost all of that move was finished before the extremely slow overnight session began. Asia didn't seem to react much, but markets took on a skeptical stance into European hours. The picture soon came into view of Thursday's "base-hit" merely amounting to a pop fly, quickly falling back to earth.

And now this morning, domestic traders have finished off the skepticism that began in Europe with the earliest risers selling stocks and buying bonds ahead of the 8am open with the hour and a half of trading since then confirming the move. In other words, the ball is back on the same ground that it was before yesterday afternoon's base hit.

Fannie 3.0s are up 4 ticks at 104-29, right in line with yesterday's best levels. 10yr yields are back down to 1.706, right in line with yesterday's lows and S&P futures have slumped just over 10 points since yesterday's close.

The game, however, isn't over yet, and there's at least one more meaningful pitch this week. The President hosts Congressional Majority/Minority leaders in closed door meetings at the white house. "There's the wind-up!" The "pitch" will come if we get any actionable soundbytes following the talks. The risk to bond markets is that the meeting's conclusion amounts to another, more solid "hit" for risk markets, potentially hearkening an 11th hour deal, destined for legislative Hail Mary's beginning with the House's Sunday session.

For now, markets continue to look like they're mostly just waiting for the pitch before they take off running. That said, the domestic stock market open has seen a slight uptick in equities in the first 5-6 minutes of trading and a bit of pressure on bond markets as a result. The nice thing about all this Fiscal Cliff trading is that the "stock lever" has been quite well connected as markets trade broad "risk-on vs risk-off" concepts, just like the good old days. The risk is that equities markets muster more optimism about the "pitch" that's probably coming later today, forcing bond markets to take up a more defensive stance ahead of time.

Chicago PMI data is coming up at 9:45am followed by Pending Home Sales at 10am. Volume has been fairly low this morning, so with nothing better to swing at for now, markets may try their luck with some sort of reaction to the PMI data by way of warm-up for their actual "at-bat" following whatever news is produced by today's meeting.




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