Foreign Demand for TSY Notes and Bonds Still Strong
The Treasury Department this morning released Treasury International Capital data for January 2010. This report tracks flows of investment funds leaving and entering the U.S financial system.
Foreign accounts bought a net total of $61.4bn in TSY notes and bonds in January 2010. Compare that to $69.9bn in Dec and $117.9bn in November and $289.2 billion in January 2009.
Notes are debt securities with a maturity between 1 year and 10 years (rate sheet influential). Bonds are debt with a maturity greater than 10 years. Both notes and bonds trade with a coupon. Yields are determined by the coupon and the price the market is willing to pay for that coupon clip. For instance, the 10 yr note is trading with a 3.625% coupon. Current market is 3.71%. The yield is higher than the coupon, the 10 year note is trading at a price of 99-05. If the 10 yr note was yielding 3.60%, it would be priced over 100-00.
Here is the table from the release. I highlighted public and private spending on TSY notes and bonds.
Between private and public accounts, foreign holdings of Treasury bills decreased $44.4 billion. Bill are debt with a maturity less than one year. They do not trade with a coupon, they are priced at a discount and principle is returned at par upon maturity.
Plain and Simple: foreign accounts bought more TSY notes and bonds and sold a greater amount of Treasury bills (maturity less than one year). The increase in note and bond buying is what we want to hear. While much less than buying interest one year ago...there is still strong demand for risk averse, long term, AAA rated US debt securities
Here is a recap in the press release:
Below is a breakdown of major foreign holders of US TSY debt. China dumped $5.8 billion in January (bills not notes). Russia shed a hefty $17.6 billion. Luxembourg sold $9.3billion. The UK was a big buyer (Euro weakness)...adding $27.9 billion to their portfolio.
Onto the markets....
The FN 4.5 mortgage-backed security coupon has lost some ground as the morning has progressed. One should not be using the term "progressed" to describe anything in the rates market today though. Its been slow across the board.
I am revisiting the week over week chart to avoid scaring you. Price action, while weaker on the day, is still contained in the recent range. The FN 4.5 is currently -0-04 at 100-24....retesting 100-24 support.
Below is the two day chart...see what I mean? Price action is more intimidating when not presented in the context of the range.
Last week I spent a fair amount of time calling attention to what I called "POSITION RESISTANCE". This is a price level which saw a heavy amount of sell tickets. I said it would take a market moving event to push the 10 year contract through this layer of position resistance....of course any breakout would need to be accompanied by heavy buy side volume (more than the previous amount of selling at least). Well, the 10 year contract got stuck there again this morning...volume actually increased into the down trade after a failed attempt to break through "position resistance at 116-29. POSITION RESISTANCE is blocking further progress....
There just isnt enough participation in the rates marketplace to push the 10yr contract through the above discussed layer of "position resistance". Barring a tapebomb before the FOMC statement is released at 2:15pm tomorrow, the best we can hope for is that 10s keep testing this layer of position resistance. On the flip side, in terms of room to run in the downside direction....on Friday there was a hefty amount of "buying at the lows", which put a level of "position support" under 10s. Unfortunately that level of support is concentrated at lower price levels, so there is a possibility that we see more weakness in 10s before the FOMC release.
Overall...we are likely stuck in this range until an "event" moves enough money in the same direction to take out positional resistance. Where 10s go...current coupon mortgage-backeds will follow. REPRICES FOR THE WORSE AT 100-20.