Bargain Buyers Missing from Bond Market. Rates Off to Rough Start

Happy 57th Birthday to Ben Bernanke!

The Fed Chairman shares his birthday with Taylor Swift who turned 21 at midnight. I wonder if she made it through all 21 shots.  Do you remember your 21st?  I had the privilege of celebrating mine with 10-15 teammates in Panama City, Florida (which we called Pana-MALE City).  Yeh that was fun but I still can't get "Yeah" out of my head. Best of luck Taylor Swift. I hope she is feeling well this AM. I'm sure Bernanke didn't do 57 shots last night but it might feel like he did after the bond market's poor performance last week...

5-year TSY yields moved 40bps higher. 10s are up 30bps since last Monday. The 2s/10s curve is 20bps steeper. And the "best execution" 30 year fixed mortgage rate jumped to 4.75%. Blah. HERE is a chart illustrating just how painful the pain trade has been for mortgage rate watchers.

Although a year-end lack of liquidity can be cited as a catalyst for exaggerated increases in interest rates lately, strategic bargain buyers have closed their wallets and are now demonstrating a clear willingness to wait and see see just how cheap the TSY market can get before oversold indicators overwhelm the onslaught of opportunistic inflation hawks and economic optimists (hoping that group doesn't include too many bond vigilantes looking to attack our AAA credit rating).

Global equity markets rallied overnight led by a 2.88% improvement in the Shanghai Composite after the PBOC decided to delay a preemptive interest rate hike to fight the inflationary pressures of a rapidly growing economy (but they did hike reserve requirements). If you are one of those folks who likes to hem and haw about inflation, the U.S. is probably not the best spot to root your argument. You would however have a great case if you focused in on emerging economies like Brazil, China and India.  READ MORE ABOUT CHINESE INFLATION

Domestic inflation or not, benchmark Treasury yields continued their trek higher in the overseas session last night and are extending those losses this AM. This is playing out with a crowded economic calendar ahead not to mention a vote on the extension of both Bush era tax cuts and unemployment benefits.Patrick wrote a rousing summary HERE.

Overnight TSY flows were mixed but short sellers maintained control and led price levels lower, albeit in a generally quiet environment. The yield curve is another 4bps steeper thanks to localized weakness in the 10yr sector of the curve. This focused frailty comes in the face of another Fed QEII purchase in the belly of the curve. The NYFRB today will buy $7-9 billion in Treasuries maturing between 6/2016 and 11/2017. This coupon lift  will be supportive, even if only in the short run. That is already apparent as we're off our weakest levels of the day at the moment. Unfortunately the modest rally seems to be more a factor of short sellers doing some position squaring (short covering) vs. bargain buying. Thus, whether it be a function of illiquid trading conditions or not, mortgage rates will still creep higher this morning. Happy Birthday Ben Bernanke....

The January delivery FNCL 4.5 is -7/32 at 101-23. The January FNCL 4.0 is -8/32 at 98-22. Loan pricing should be about 25bps worse based on current indications. I've got the current coupon marked at 4.188%.

As you can see, we're off our early session price lows, but just barely.