The Day Ahead: Risk Trade Off Again. Bond Market Scheduled for Early Close

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Good Morning.

I feel fat and lazy but the yield curve is bull flattening and "rate sheet influential" MBS coupons are chipping away at the unraveling that occurred on Wednesday in the bond market. That should at least give us the energy to make it through a holiday shortened trading session today.  

Global equity markets traded lower overnight, sovereign debt spreads are wider, commodities prices are deflating and Treasuries are catching a bid in decent trading volume (550k in 10yr TSY futures including both Dec and March delivery).

North Korea and Europe are back in the headlines and cited as a source of the market's motivation. The risk trade is off again...

The long end of the government yield curve is outperforming with 30s 7bps better and 10yr 6bps better. The 2s/10s curve is 3bps flatter at 235bps wide while the 2s/30s curve is 4bps firmer at 371 wide.  Strength in longer lived benchmarks is having a positive influence on production MBS coupon prices. The FNCL 3.5 is up 8/32 at 97-30 and the FNCL 4.0 is +2/32 at 101-03.

Overseas stock markets were down overnight but not big. The NIKKEI was -0.40%, the HANG SENG closed -0.77%, SHANGHAI was -0.92%. The FTSE is currently -0.85% and the DAX is -0.79%.  The dollar is catching a flight to safey bid, the DXY is +0.67%. Strength in the dollar is eroding valuations in the commodities space. Light Sweet Crude is -0.98%, Gold is -1.40%, and Silver is -3.38%. S&P futures are -9.25 points at 1187.25.

These flows may be fickle. If U.S. equities catch fire Treasuries and MBS will lose positive progress. BEWARE OF HOLIDAY INDUCED ILLIQUIDITY. The chance for chopatility is high.

Key Events in the Day Ahead....

No domestic data will be released. The Fed has no QEII purchases scheduled nor do they have any speakers standing at the bully pulpit. This leaves the market to focus its attention on early Black Friday retail sales reports, austerity events in Europe, and developments on the North Korea/South Korea boarder where U.S. troops are preparing for a weekend military exercise.

The bond market will close at 2pm eastern.

SIFMA Recommends Early Market Close on November 26 and Full Market Close on November 25 for Trading of US Dollar-Denominated Fixed-Income Securities in the US in Observance of the Thanksgiving Day Holiday

New York, N.Y., November 11, 2010 — The Securities Industry and Financial Markets Association has confirmed its previous recommendation for an early close at 2:00 p.m., EST, on Friday, November 26, and a full market close on Thursday, November 25, for the trading of US dollar-denominated fixed-income securities in the United States in observance of the Thanksgiving Day Holiday.

These recommendations apply to trading of US dollar-denominated government securities, mortgage- and asset-backed securities, over-the-counter investment-grade and high-yield corporate bonds, municipal bonds and secondary money market trading in bankers’ acceptances, commercial paper and Yankee and Euro certificates of deposit.   

The early close will not affect the closing time for settlements.  

SIFMA’s recommended full market closes are recommendations only; each member firm should decide for itself whether its fixed-income departments remain open for trading.  All SIFMA recommendations are subject to change due to market conditions.

The Securities Industry and Financial Markets Association (SIFMA) brings together the shared interests of hundreds of securities firms, banks and asset managers.  SIFMA's mission is to develop policies and practices which strengthen financial markets and which encourage capital availability, job creation and economic growth while building trust and confidence in the financial industry.  SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA).  For more information, visit www.sifma.org.