Bonds Show Signs of Rally Exhaustion as Stocks Defend Support Levels

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Stocks are defending yesterday's positive progress while benchmark interest rates exhibit signs of rally exhaustion. Trading volume is however low across the board so it's difficult to make much of this price action.

S&P futures are +1.25 at 1090. Notice how volume faded into the rally yesterday, that rally is being retested today.

After  steepening  yesterday, the yield curve is bull flattening again but swap spreads are inching wider, volatility just totally deflated, and trading flows are leveling out after going one-way for days (was all buyers now less buyers and a few more sellers. buyers still in control overall).

The 2-year note is UNCH at 100-08 yielding 0.496%. The 2.625% coupon bearing 10-year note is +0-10 at 100-06 yielding 2.605% (-3.6bps).

Since undergoing a spread tightening short squeeze into August TBA settlement and the Fed's QEvLite announcement, production coupon MBS have been performing poorly on a relative basis vs.TSYs. This trend continued again yesterday after more than $5bn in new production loan supply was offered by originators.

Price levels are lower and spreads are wider today. The FNCL 4.0 just hit a new intraday low. Loan pricing is about 8bps worse on average today, reprices for the worse are possible given the fact we are 9 ticks off the highs. 

The October delivery FNCL 4.0 is -0-01 at 102-05 and the FNCL 4.5 is -0-06 at 103-26. The current coupon is another 4bps wider vs. the TSY curve but doing better vs. wider swap spreads.

Stocks are super cheap vs. bonds, we get auction supply terms tomorrow from the Treasury (2s, 5s, 7s), and the econ calendar is thin for the rest of the week.  With that in mind, the bond market looks to have found a floor (YIELDS)  for the time being, so unless stocks tank  I think we're due another day like yesterday. My short term outlook: RATES HIGHER IN THE DAYS AHEAD

Don't panic though, once near term tactical weakness is washed out, we should see bargain buying from the hoard of accounts who went long last week. Check out the long term 10-year note chart in THIS POST for an idea of the 10-year note's trading range.