Bond Market Loses Bid. Rates Trending Higher After Breaking Support

WikiLeaks founder Julian Assange surrendered to police in London this morning over allegations of sexual assault. In a statement released by the Met, Assange is "accused by the Swedish authorities of one count of unlawful coercion, two counts of sexual molestation and one count of rape, all alleged to have been committed in August 2010."

If you are not "in the know", WikiLeaks was a website that published anonymous submissions and leaks of sensitive government, corporate, organizational, or religious documents. The sources of these leaks were essentially untraceable, making it hard to figure out what information was truthful and what was a hoax. Nonetheless it threatened the national security of all nations and was viewed as a thorn in the side of Wall Street. Julian Assange will probably go away for a long time and his site is no longer in service, so I guess we'll never find out who killed Kennedy. 

Anyone ever see Will Smith in Enemy of the State?

Don't ask me how this affects the bond market. I am presenting this story purely from a "what a moron" perspective. Seriously did he really think his attempts to overthrow global governments would be successful? I bet he gets handed over to North Korea where he will be forced to NARFLE THE GARTHOK!!!

Speaking of tainted love and wanting to "get away", rates are up this morning, erasing the positive progress that was made yesterday....plus more. The 2s/10s curve is the steepest its been in about 8 months 260bps wide.  The 5 year note is up 8.2bps to 1.598% and the 10yr note is down over a full point in price and up 12.3bps in yield to 3.051%. The chart below draws attention to two sets of fibonacci fans which have been quite accurate during the run up in rates (dotted gray lines).  We're heading toward a test of 3.07-08% in 10s.

The FNCL 4.0 is 16/32 lower in price at 100-26 and the current coupon yield is indicated 5bps higher at 3.915% (in my model). Thus we are tighter on the spot but wider on option adjusted basis as shorted dated vols catch a bid and accounts reduce extension risk.

Blah.  Patrick wasn't kidding this morning when he said "Global optimism in equities has sucked the bid in Treasuries dry."

That post explained the logic behind today's equity rally...proposed tax cuts for all and extended extended unemployment benefits for the jobless (no typo there). Stocks are stuck in the short term and trading higher on any excuse to build year end profitability/strengthen year end performance metrics....and it's sucking the life out of mortgage rate watchers in the process.

If we were looking at this from a rational bond trader's perspective we could say both policies will widen the budget deficit and increase Treasury issuance in the year ahead, which would need to be priced into debt valuations now, which seems to be the case today. Then again I am really trying my hardest to rationalize this move for you when I should be sticking to my guns and reminding you of the weak underlying fundamentals that will be a major drag on the alleged economic recovery.  People keep hemming and hawing about inflation but overlook the fact that, of the 15.1 million persons unemployed in November, 41.9 percent had been jobless for 27 weeks or more. Oh and that 15.1 million number doesn't include 1.3 million discouraged workers either. Investments in productivity (technology) will drive a modest recovery, but they won't do much to address major mismatches between labor demanded and labor supplied. Automation (robots) is taking over, we're leaving behind a generation of blue collar, non-specialized workers.  If you still think inflation is the real issue,  then we'll lean on the housing market as a source of continued disinflationary pressure in the U.S. I know we can all identify with that....

Plain and Simple:  As evidenced by the paradoxical reaction to the Employment Situation Report, bearish technicals are moderating any positive progress in the bond market. We are mindful of rising inflationary expectations but believe they are overblown by politicians and economists with an ax to grind. While we acknowledge strong performances in specific sectors of the economy, we are skeptical of sustained recovery momentum because the primary source of income distribution in America, the labor market, is still broken.  This larger than normal amount of resource slack in the system will prevent goods and services providers from passing along higher prices to bargain hunting consumers.

Seems like we'll be stuck with these rates at least into early 2011.

$32 billion 3s at 1pm. The real test isn't until tomorrow when $21 billion 10s need to be underwritten.

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