Happy Monday morning. Yesterday was Matt Graham's 30th Birthday. Shout out to the 30yr old. I am still 26...as Nelson Muntz would say "HA HA" :-D
The bond market "relief rally" extend positive progress last week as nervous investors sold stocks and reallocated funds into risk free government backed assets. We went out the door on Friday with stock markets near month over month lows and interest rates at the best levels we've seen since early December.
Many reasons can be cited for increased nervousness in the marketplace, I blame political poo slinging and policy rhetoric for the most part though.
First there was the Republican Senate victory in Massachusetts, then Obama's plan to reduce risk in the banking system, after that followed increased opposition of Ben Bernanke's reconfirmation as Chairman of the Federal Reserve, and last but not least, as the week came to a close, was a tapebomb regarding the fate of the GSEs. The general response to the above developments was a three day losing streak in equity markets as traders adopted a "SELL NOW ASK QUESTIONS LATER" bias. This turned out to be a net positive on the mortgage market, by Friday mortgage rates were at their lowest levels in over a month...
Although the above affairs of the state added another layer of uncertainty to an already muddled marketplace, when returning to the reality of "here and now" we are reminded that the resulting effect of each event is yet to be determined and therefore difficult to price into asset valuations. This left "flight to safety" positions in the yield curve vulnerable to shifts and short term sentiment, specifically DO STOCKS REBOUND OR RETRACE A BIT FURTHER????
The WEEK AHEAD offers plenty of opportunities for investors to sort out outlooks and reallocate funds. Our overall "glass half empty" feelings toward economic reality will likely manifest themselves through three seasonally weak housing data points. Advantage bond bulls. Later in the week we get Q4 GDP which is expected to indicate continued growth off of record low levels of economic activity. That should boost the sentiment of stock traders.
In between we get more Treasury debt issuance: $44 biillion in 2s on Tuesday, $42bn 5s on Wednesday, $32bn 7s on Thursday. We've been through this before and know how it plays out. Its a trader's world and we're just living in it. This means, given the opportunity, rates traders would love to create "room" for new TSY supply by pushing benchmark yields higher.
While the ongoing glut of debt supply is nothing new to the bond market, there is an interesting twist to this week's issuance: it falls during an FOMC meeting. In general this "event" serves to slow the pace of trading flows as money goes into a holding pattern while monetary policy strategy is sorted out and FOMC communications are prepared. We don't expect much change in tone from the Fed, perhaps a renewed focus on ECONOMIC STAGNATION and SLOW GROWTH at most, but there is that one lingering issue that everyone would like to see addressed: THE FATE OF THE FED'S MBS PURCHASE PROGRAM.
We dont anticipate any drastic developments on the future of the GSEs anytime soon, perhaps the already lifeless mortgage market will be expected to lean on Ginnie and FHA for funding support, or maybe a new swap window will be opened for GSE debt holders to exchange FN/FRE securities in times of great economic stress. While we have already stated that we are OK with the Fed moving toward stage left (as long as there is some sort of backstop put in place to provide liquidity), we are still quite curious to see how the Fed balances the quantitative effects of an exit from the agency market with the politics of such a withdrawal.
To top it off, if the above events are not enough reason for excitement, the Ben Bernanke telenovela should reach a summit at some point this week. While we are hopeful for the reconfirmation of Bernanke's position as Chairman of the Fed, we do respect the effects that doubt can have on the marketplace. Wall Street is a Ben supporter, with that in mind, in times of increased "renomination uncertainty", the bond market could benefit from another flight to safety rally.
Phew...lots to consider this week. One thing I forgot to mention is the technical side of the marketplace. "Rate sheet influential" TSYs have been performing well but are now looking a bit oversold and possibly due a period of reconsideration and consolidation. In this busy week, traders should remain defensive of extended progress and be quick to take profits. Barring any unforeseen tapebombs (which are actually quite possible), anticipate a bit of a tug of war (range trade). If I were hedging a pipeline of my own I would be floating day to day with my finger close to the LOCK button on my already registered but yet to be committed oans. GOT IT?
As the week begins we find this theme is already apparent. Stocks are trading higher off of last week's lows and interest rates are moving marginally higher. Progress has not been lost though....
The 3.375% coupon bearing 10yr Treasury note is -0-06 at 97-30 yielding 3.625%. I called attention to the all important 3.62% pivot in the chart below...
The FN 4.0 is -0-04 at 97-26 and the FN 4.5 is -0-02 at 100-28.
Existing Home Sales data was just released...it was WORSE THAN CONSENSUS.
Here is what flashed across my news feed. I called attention to what is expected to be the two major headlines today:
10:00 25Jan10 RTRS-US DEC EXISTING HOME SALES 5.45 MLN UNIT ANNUAL RATE (CONS 5.90 MLN) VS NOV 6.54 MLN (PRV 6.54)-NAR
10:00 25Jan10 RTRS-US DEC EXISTING HOME SALES -16.7 PCT (CONS -10.0 PCT) VS NOV +7.4 PCT (PREV +7.4 PCT)-NAR
10:00 25Jan10 RTRS-US DEC INVENTORY OF HOMES FOR SALE -6.6 PCT TO 3.289 MLN UNITS, 7.2 MONTHS' SUPPLY-NAR
10:00 25Jan10 RTRS-US DEC NATIONAL MEDIAN PRICE FOR EXISTING HOMES $178,300, +1.5 PCT FROM DEC'08-NAR
10:00 25Jan10 RTRS-US 2009 EXISTING HOME SALES +4.9 PCT OVER 2008 TO 5.156 MLN UNIT RATE-NAR
10:00 25Jan10 RTRS-US 2009 MEDIAN PRICE -12.4 PCT OVER 2008 TO $173,500-NAR
10:00 25Jan10 RTRS-US DEC EXISTING HOME SALES LARGEST DECLINE SINCE DATA SERIES BEGAN IN 1968-NAR
10:00 25Jan10 RTRS-US DEC YEAR-OVER-YEAR MEDIAN PRICE LARGEST GAIN SINCE SINCE MAY 2006, FIRST RISE SINCE AUG 2007-NAR
10:00 25Jan10 RTRS-US DEC INVENTORY OF HOMES LOWEST SINCE MARCH 2006-NAR
So far, 10s are holding steady near 3.625% and the FN 4.5 hasnt budged from 100-28.