That was the first thing I posted on my FB page as the clock ticked past midnight on 1.1.11.

What it means is I expected volatile interest rate activity in 2011.  The world is sensitive to many issues. Especially money, politics and religion. So from where I was sitting at the moment, it made sense to expect the unexpected in '11.

Case and Point: THE HORRIBLENESS OF JAPAN'S LATEST ROADBLOCK TO RECOVERY. The entire situation is stomach-turning.

Atrocities aside, the event still took place. And the flight to safety that followed definitely led interest rates lower, but now we're backing up. Duration is drifting longer....

After stagnating near key inflection levels for what felt like an eternity,  the 10 year Treasury note has broken through a cluster of support between 3.40 and 3.42%. This directional move started last week as a technically-driven upward drift from overbought levels (3.18%).  A corrective winning streak for stocks combined with a steady trickle of hawkish Fed rhetoric then contributed to further weakness in bonds. Now today fixed income investors are using the bearish technical environment to build in a price concession for next week's $99 billion Treasury auction schedule ( 2s/5s/7s). More simply put, there has been little push back against this sell-off. Flows have clearly favored fast money short sellers. Bid wanted....

That perspective allows us to plant a few seeds of encouragement in your head before the weekend. But doesn't get us overly excited...

  1. Although quite alarming, the directional drift and subsequent breakage of key support was not backed by high trading volume and has therefore not been confirmed.
  2. Secondary Market Current Coupon MBS yield spreads touched 2-week "tights" today as investors chased current market yield valuations/price levels. These are bargain buyers putting funds to work at lower dollar prices and higher yields! That is a positive sign. Short covering was also noted earlier in the day. And more should be in the works as month end quickly approaches.  CC +2bps at 4.189%. +74/10yT. +63/10yIRS. +201/5yT.  Was just +82/10yT on Wednesday.
  3. In the same tone of "bargain buying", we have Treasury auctions next week, and they've cheapened up nicely over the past seven sessions...creating more incentive to buy at fatter yields.  Also,  Japan's central bank is able to pressure the Yen lower by purchasing dollar-denominated U.S. Treasuries, making them a likely buyer next week (year end soon for Japan as well). Our biggest concern is overseas investors continue their trend of shying away from shorter-dated debt because of their own inflation problems.
  4. Headline Driven Flight to Safety: The myriad of global issues discussed in THIS POST have not been resolved. Global markets are extremely sensitive to shocks. 

Plain and Simple: The market has largely ignored economic data and breaking news headlines all week. Investors have instead based their decisions on trading technicals... which are now looking bearish.  But volume hasn't confirmed those bearish technicals and it just so happens that we've got $99 billion in 2-year, 5-year, and 7-year debt on the auction block next week. There are no coincidences on Wall Street. Unfortunately while our gut tells us this back-up is temporary, our brain forces us to remind you of what's currently moving the bond market: TECHNICALS. And what might be at stake for mortgage rates....

From Rate Techs: Teetering on a Directional Shift: "If 10s failed to stick below 3.40%, trading technicals would lean in favor of the bear camp and a range trade between 3.40% and 3.70% would be on the table." If that scenario played out, C30 Best Execution would range from 4.875% to 5.25%. 


PS.  We've got a high-risk event next Friday: THE EMPLOYMENT SITUATION REPORT. Normally the BLS doesn't release official jobs data when the first Friday of the month falls on the first day of the month, but the previous release indicates it's on like Donkey Kong. Friday, April 1, 2011.  April Fools?

PPS. Seriously? I see hawkish Plosser headlines everywhere today.  Why are hawkish Plosser comments suddenly a surprise?