Bond Markets Open In Predictably Weaker Territory
At the apex of the December's biggest Cliff-related sell-off, 10yr yields backed up to 1.85 and our longer term charts noted a 1.865 retracement level. This was MND's take
on the morning following that relatively disconcerting sell-off:
"Even if yields can simply hold sideways, as long as they bounce back lower BEFORE a Cliff deal is imminent, it leaves room for current weakness to be construed as a "surprise inspection of the range." This, in itself, would leave room for that recently explored range boundary to have a shot at being a supportive ceiling against any post-Cliff-deal sell-offs."
In other words, the fact that 10yr yields have topped out at 1.860 this morning is a promising sign and perhaps even a little boring (not wanting to tempt fate here, but a post-cliff sell-off to anything near 1.85 was definitely on one of the first few pages of bond markets' play book).
The motivations for the sell-off have more to do with the fact that "something" was accomplished as opposed to utter and complete political gridlock preventing any attempts to avoid the Cliff. Certainly, last night's deal isn't any sort of epic solution to the underlying problems--no "grand bargain"--but it does fulfill the "something is better than nothing requirement.
Pent up knee-jerk reactions are also feeding into this a bit with much of the market closed in the overnight session, and the US holiday keeping domestic securities trading off line until 230am for cash Treasuries and 6am for rates/equities futures this morning. That means that London didn't even trade US stock futures until 11am GMT. While Treasuries yields were already fairly well adjusted by 6am, there was another moderate grind higher as domestic activity ramped up with 10's topping out at 1.860 precisely at 8:48am.
MBS opened roughly 10 ticks weaker than Monday's latest levels at 104-16 and moved a few ticks lower before finding their footing at 104-13. After 10's confirmed the 1.860 bounce, MBS noticeably improved, but met overhead resistance at 104-20 before settling in for a sideways grind between there and 104-18 for the past hour.
The rest of the day is characterized by hopes and dreams that the 1.860 ceiling holds firm in 10yr yields. This would be a unbelievably boring and uneventful outcome for the Fiscal Cliff quasi-deal signed late last night. To be sure, even if we break higher, the generally less-than-triumphant structure of the deal should serve to keep the lid on excessively painful sell-offs, but unfortunately, those possibilities are out there to some extent.
If data is to be of any concern to markets today, we'll know in 1 minute when ISM Manufacturing hits. Otherwise, we're very much in "watch and react" mode as we watch markets continue to react to the Cliff deal. So far... holding ground in weaker, but unsurprising (and perhaps even "promising") territory. Let's hope that continues to be the case.