Stronger Levels Thanks To Europe, But Resistance Ahead
Treasuries Backed up to yesterday afternoon's weakest levels at the start of the European session, but were soon in rally mode along with German Bunds. Whereas stronger German economic data facilitated moderate weakness earlier in the session, Italian political drama took a toll on peripheral spreads which paved the way for core debt to move lower in yield ahead of the ECB Announcement and Press Conference.
The Announcement itself, along with stronger-than-expected domestic Jobless Claims arrived to little fanfare at 8:30am, but bond markets have since taken cues from Draghi's press conference where the ECB President said that European Central Bank governors were widely discussing interest rates, including a potential move to NEGATIVE INTEREST RATES on the ECB's deposit facility. Those comments followed closely behind massive negative revisions to 2013 GDP forecasts where ECB governors see a range of -0.9 to +0.3 vs a previous range of -0.4 to +1.4.
MBS and Treasuries were already off to a moderately positive start for the day, but those Draghi comments provided a noticeable boost, taking 10yr yields down under 1.57 from 1.58+ and lifting MBS from 105-12 to 105-14.
Those levels have essentially held flat leading into the domestic stock open where S&Ps have moved a bit higher out of the gate. So far this looks to be giving bond markets at least a small pause for reflection on their rallying ways, though we'd emphasize that the two sides of the market don't mind a certain level of disconnection these days. That said, we're coming up against some technical resistance regardless of stock market gains, so we're feeling generally more defensive today, but especially after the 11:00am conclusion of Fed Twist buying.
Apart from the Fed operation, there's nothing else on the calendar, leaving the potential for any Fiscal Cliff headlines to have an impact later in the session, as well as tradeflow considerations ahead of tomorrow's NFP. Again though... without a salient, negative Cliff headline or another compelling reason for bond markets to extend the late november rally, further progress is challenging to say the least. For MBS's part, they're already showing a clear predisposition to treat 105-14 to 105-16 as overhead resistance. The first major downside pivot is 105-11, providing a clear line in the sand for and early indication of a shift toward increased reprice risk if crossed later in the session.