It's almost an insult to trading levels, volume, and volatility to make much mention of the actual nuts and bolts of the day ahead. Monday was dominated by tradeflows and technicals. Accounts were more concerned about where various bond market securities were trading, who was buying, who was selling, and in what amounts, than any direct connection between economic data and price movements.
A couple points of order here... Bond markets are interested in that "stuff" every day. Monday wasn't special in that regard. Neither would we want to assume that the Durable Goods beat was inconsequential, because certainly, it was. But the data served its biggest purpose as a jumping-off point for all that tradeflow/technical "stuff," and that's what dominated the session, to a much greater extent than normal.
10yr yields breaking above 2.0% was a concern for MBS market participants because of the way they adjust their portfolios to account for anticipated duration. It's not that 2% is a magic number that necessitates extra selling pressure for MBS, but it's not completely devoid of magic. To oversimplify, 10's crossing over 2% roughly coincides with a shift away from longer duration MBS holdings, which unfortunately, are the ones keeping rates in the sub 3.75% range. This is one of the reasons for MBS outperformance as 10's backed down from 2% into the afternoon (also a bit of an unwinding of underpeformance as things got dicey on Friday).
Arcane details aside, 2% is 2%. It's a big, round number that we haven't seen for more than half a year in 10yr yields and it feels pretty damn high to anyone who got comfortable with the range in the second half of 2012 which favored 1.55-1.85. That was an easy moment to get caught up in, but now it's time to get "uncaught" and be serious about the risks. In all likelihood, we've moved through the inflection points around 1.85 and are trying to figure out what's next.
The rest of this week helps decide that. It was somewhat comforting that solid buying came in from "buy and hold" account types as bond markets hit their weakest levels. That said, there's room for additional weakness depending on the rest of the weeks events and it wouldn't be asking much for 10's to poke and prod the low to mid 2.00's before finding a firmer short term ceiling. If the big ticket data supports that bounce back, things could get pretty bullish, pretty quickly. Don't mistake that for a return to the "good old days" if it happens, as it would most likely still leave the big picture drifting toward weaker levels in the long run, but it could make for opportunities in the coming days and weeks.
The market events with the potency for such feats have the day off on Tuesday. Consumer Confidence is moderately important, and can definitely motivate movement. Same story with the 5yr Note Auction, but the stars of the show arrive Wednesday and Friday with the FOMC Announcement and NFP respectively. Monday's ranges began setting building the new wall on this week's bond-market sandbox (around 2% 10yr yields and 103-00 in terms of Fannie 3.0s) and Tuesday--at least for bond bulls--will be spent watching to see if it stays sturdy.
Live Econ Calendar:
Week Of Mon, Jan 28 2012 - Fri, Feb 1 2012
Mon, Jan 28
Pending sales change
2-Yr Note Auction
Tue, Jan 29
Case Shiller Home
Prices (20 City Month-Over-Month)
5yr Treasury Auction
Wed, Jan 30
7-Yr Note Auction
Thu, Jan 31
Personal income mm
Fri, Feb 1
Unemployment rate mm
* mm: monthly | yy: annual | qq: quarterly | "w/e" in
"period" column indicates a weekly report
* Q1: First Quarter | Adv: Advance Release | Pre: Preliminary
Release | Fin: Final Release
* (n)SA: (non) Seasonally Adjusted
* PMI: "Purchasing Managers Index"
Join Now or Login to Post Comments