Bond markets continue to weaken as European peripheral markets are generally more upbeat after receiving their promised holiday gift in the form of the 3yr loans being handed out by the ECB (LTRO or "long term refinance/repo operation"). We don't have details yet on which countries borrowed which amounts (tomorrow morning around 930am EST), but with expectations ranging from 150-550 billion Euros, this is a pretty big deal. As opposed to the ECB directly stimulating various parts of the ailing EU sovereign debt landscape, they can simply hand out loans so that countries can stimulate themselves...
So far, this seems to have excited the "risk-on" trade as stocks and bond yields are up moderately. We'd be careful not to chalk too much significance up to what is essentially a shuffling, but not elimination of debt (LTRO is basically a 3yr loan), especially when volume remains fairly thin and pre-auction and even technical considerations can be argued to be dragging bond yields higher as well. The better-than-expected Housing Starts reported earlier don't factor into these swings much, but still an interesting read for those in the mortgage industry (READ MORE).
Either way, it's interesting and perhaps a bit surreal to consider that 10yr Treasuries have "sold-off" 26/32nds in price, 8.9 bps higher in yield, to 1.899. Let that be a caveat to the terminology. We don't really consider anything that happens under the previous range boundaries--at their lowest, in the 1.94's--to be a legitimate "sell-off" or "rally." Whatever terms used to describe bond market losses so far this morning, one thing's for sure: it's all been a very orderly affair, mitigated only by a brief spike outside a narrow range following the release of details on today's round of Fed buying in the long-end.
Although MBS prices are also weaker, the silver-lining to these "risk-on" sell-offs is that MBS are one step less risky than benchmark TSYs. When TSY yields rise, MBS yields tend to rise less quickly, thus the gap between the two gets smaller, aka "tightens." Here's an hourly chart of that yield relationship between 30yr current coupons and 10yr yields:
The result is a Fannie 3.5 MBS coupon that's largely been able to avoid the more directional weakness in 10yr yields, instead sort-of drifting sideways and ever-so-slightly lower, but generally trying to hold on to 102-13 to 102-14:
Next market mover on the horizon is the 1:01:30 PM release of 5yr Auction results.