The Day Ahead: Auction Concessions Steepen Yield Curve. MBS Outperform

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A second round of quantitative easing appeared to change from “if” to “when” in yesterday’s release of the latest FOMC minutes. Equity markets across the globe responded favorably and US equity futures are jumping ahead of this morning’s opening bell.  However in the bond market,  traders seem to have already accounted for QEII in debt valuations and are now focused on discounting bond prices ahead of Treasury debt issuance.

S&P 500 futures are up 9.00 points at 1173.50 and Dow futures are 74 points higher at 11,031. In China the Shanghai composite closed 0.70% higher, in Hong Kong the Hang Seng was +1.45%, in Tokyo the Nikkei went out +0.16%, in Paris the CAC is up 1.80%, in Frankfort the Dax is +1.83%, and in London the FTSE is +1.44%.

The yield curve is steeper and benchmark interest rates are higher ahead of a $21 billion 10-year Treasury note auction. The 2s/10s curve is 3bps steeper at 209bps. The 10-year note is -0-06 at 101-15+ yielding 2.454% ( +2.5bps) and the long bond is -0-21 at 100-10+ yielding 3.857% (+3.7bps).

In the MBS market, production coupons are outperforming their benchmark guidance givers. The December delivery FNCL 3.5 is UNCH at 100-22 and the December 4.0 is -0-02 at 102-26. Yield spreads are tighter as the day gets underway.

Fed policymakers had the “sense that (more) accommodation may be appropriate before long,” the minutes said for the Sept. 21 meeting. They also read: "Many members considered the recent and anticipated progress toward meeting the committee's mandate of maximum employment and price stability to be unsatisfactory.”

The topic will remain a focus today with chairman Ben Bernanke speaking this afternoon.

Key Events Today:

JPMorgan posts earnings. Results are expected to be moderately higher, according to Reuters. “Wall Street expects the bank to report an anemic 1.3% increase in profit over the same period last year,” the newswire said, adding that the result could set the tone for a tough Q3 earnings season.

2:00 ― The Treasury is expected to report in its latest Budget Statement that revenues were $32 billion short in September. Estimates range from $30 billion to $42.5 billion. Whatever the result, it adds to a year-to-date fiscal gap of $1.26 trillion, compared with $1.38 trillion in the same 11 months one year ago. It’s unclear if the market will be paying much attention, but with November elections coming up the final 2010 number is sure to figure into political campaigns to reduce the deficit and pin blame.

4:10 ― Ben Bernanke, chairman of the Fed, speaks in a discussion on business innovation at Cleveland Fed event in Pittsburgh.

4:30 ― Sheila Bair, Chairwoman of the FDIC, speaks at the Urban Land Institute Conference in Washington.

6:45pm ― Jeffrey Lacker, president of the Richmond Fed, speaks to business leaders, in Chapel Hill, NC.

ISSUANCE

* 11:30 Treasury auctions $25 bln 4-week bills
* 11:30 Treasury auctions $25 bln 56-day SFP bills
* 13:00 Treasury auctions $21 bln 10-year notes
* EIB, $3 bln 5-year [guidance ms flat]; Barc/JPM/UBS
* Bangkok Bank, $1 bln 2-part 5s/10s [guidance T+215(5s);+240(10s)]; MS
* SEK, $1 bln 5-year [guidance ms+40]; BAML/CS/GS
* Dubai Elec & Wtr Auth, roadshow this week; Citi/CA CIB/NBAD/SCB/RBS
* Pohang, $700m 5-year rumored; BAML/BNP/DB/GS/MS
* Lancer Fin, $275m 6-year rumored
* CBA, benchmark bond rumored; JPM
* Reliance Holdings, benchmark 2-part 10s/30s; BAML/Citi/HSBC

Other Events

*The Federal Reserve announces its Treasury operations schedule and approximate purchase amounts

*Import Prices and Export Prices