Posted
Interesting morning we've had....
Late comer rally chasers rejoiced this morning as stocks finally broke out of the stubborn sideways range they have been stuck in all week. The S&P is up 1.72% at 991, the Dow is 1.58% to 9213, and the flash order friendly NASDAQ is up 1.37% at 1194....ALL MAKING NEW 2009 HIGHS.
Big day for stocks! Generally days like this are muy mal (very bad :-D) for TSYs and MBS. However, for some reason the yield curve has remained surprisingly stable while equity-siders chase the profit train. Check it out...
Pretty stable right? Not much volume either....only 365,000 10 yr contracts traded so far today.
Here is longer term perspective of importance of the above SUPPORT SUPPORT SUPPORT level....
Annnnnnnd another example of the pivot pointishness of the 3.70 support level....
OK BUT WHY TODAY? WHY ARE TSY STABLE WHEN STOCKS ARE BACK IN RUNAWAY FREIGHT TRAIN MODE?
One has to assume that,
based on the results of the previous three auctions (good demand for 20
YR TIPS, crappy demand for saturated 2s market, crappy demand for
5s)...that the fixed income investment community has set itself up
for a FLATTENER TRADE. This implies...bets are on for a flatter yield curve ...which is a good thing
for "rate sheet influential" MBS
This could be a function of TSYs being oversold and stocks being overbought (STILL). Could be a function of the market's expectations for WEAK ECONOMIC NEWS ahead (Eurodollar futures market says so at least). Could be a function of TSY supply being behind us. Either way...this is the most logical reasoning we can put behind the question: WHY THE LONG END OF THE YIELD CURVE IS HOLDING UP SO WELL WHILE STOCKS SHOOT THE MOON.
Going into price action...the seemingly stable prices of longer dated TSYs is a factor of short covering. If you thought TSYs would weaken further...why cover? (Well...volatility is an explanation for that...traders are more likely to tighten their trading ranges when volatility picks up).
We aren't sure of this theory...but it makes sense. Demand for longer duration debt will give us a look into the possibility of this theory proving correct. It wont be long until we get some guidance...the TSY auctions $28 billion 7 yr notes at 1pm.
Here is a look at previous 7 yr note auctions...
Just for fun...we'll go out on a limb here and say there is a decent possibility of a post auction rally. Thats my gut feeling...but we all know about the lack of logic in the marketplace...anything can happen...depends on auction.
The FN 4.5 has come off the lows of the day...."rate sheet influential" MBS coupons are waiting for guidance from their benchmark big brother. Tic Toc Tic Toc. Countdown to 1pm auction...
MBS, TSY, LIBOR QUOTES
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