The Day Ahead: No Data. Watching for Bargain Hunters

The econ calendar is empty today. This leaves bond traders to focus on underwriting $29 billion 7-year notes. Treasury closes the TAAPS bidding window at 1pm. Before that, at 10:15am, the Fed will conduct a QEII open market coupon pass. The FRBNY's trading desk will lift $4-6 billion in TSYs maturing between 6/30/2012 and 6/30/2013. Results will be released around 11am.

Rate sheet influential benchmarks sold off yesterday after Treasury auctioned $35 billion 5-year notes, upping the coupon rate from 1.375 to 2.125 in the process. If you haven't noticed yet, depending on your data feed, the 5-year Treasury note price appears to be up big today. It is and it isn't. The yield on a Treasury note or bond is a function of price, coupon rate, maturity, and face value. Because Treasury had to up the coupon rate on the 5-year note from 1.375 to 2.125 yesterday during the auction, the new "On the Run" issue was repriced to reflect the higher coupon rate. Here is the math....Investment Yield = {R + [(FV - PP)/M]} / (FV + PP)/2] where R = coupon rate FV = face value. PP = purchase price M = years to maturity

This forced a repricing across the curve and pushed benchmark yields to the outer limits of their recent range. 10s went out the door at 3.49% and the production Fannie 4.5 MBS coupon closed at session and 10-day price lows. Lenders dinged rate sheets as a result.

Cheaper debt did however draw out some bargain hunting as Tokyo went to work around 7pm last night.  The long end of the curve caught a bid in light volume on the Asian open and 10s gapped lower to 3.43% before going sideways through the early London hours all the way into the NY session where a concessionary effort has once again left the curve bid wanted and pushed yields back to the brink of another range break.

The 2.625% coupon bearing 10 year TSY note is currently +3/32 at 92-29 yielding 3.479%. The January Delivery FNCL 4.5 is +5/32 at 101-15 yielding 4.256% in my book (4.0s at 4.248%). The yield curve is 10bps steeper after experiencing a concessionary bear flattener over the past few days. 2s/10s are 275bps wide. 128k 10y futures contracts have traded on Globex as of 9am.

While a break of 3.50% in 10s would be a detriment to the psyche of rate watcher outlooks, we must remind that 3.50% has already been broken once this month and it was the only time we actually witnessed aggressive demand from real$ buyers. I point this out because we are on the brink of another range break. If 10s do cross through 3.50% support again, do not read into the move as a major game changer.  Price action is greatly exaggerated by a lack of liquidity so bond yields do not necessarily reflect a more optimistic economic outlook as much as they illustrate the effects of tactical ploys and year-end profiteering strategery.  At these yield levels we would expect to see bargain hunters acting a bit more aggressively though. We hope to see this sentiment take hold after Treasury sells $29-billion 7s at 1pm. Don't get overly excited though...it's hard to imagine any account getting too bullish before the December Employment Report prints on January 7th.

re: MBA Apps

Please note that as a result of MBA offices being closed Monday, December 27 through Friday, December 31, the Weekly Applications Survey results will not be released on December 29 for the week ending December 24, 2010. Release of the survey will resume on Wednesday, January 5, 2011 at 7 AM with results for the two weeks prior.