MBS MID-DAY: Bond Markets Benefit From European Volume and Uncertainty
As European markets continue to weaken into their close, bond markets continue to benefit from that flight-to-safety. Volume has returned in grand fashion and it's all driven by tradeflows as opposed to economic data. Newswires and trading updates have been coming in all morning indicating weakness in the European periphery. Italy... Spain... Take your pick. Spreads between those counties' debt and German benchmarks have gapped out to multi-month highs.
The ingredients have been pretty simple and the result fairly logical... We had dormant markets that knew they would be trading in higher volume today, domestic markets waiting to see how Europe would trade after their long weekend, overnight European trading generally confirmed the range break below 2.07%, Spanish debt concerns caused additional German Bund rallies in the EU, that forced the hand of domestic accounts who'd either been waiting for those European cues or who simply got "stopped out" as yield levels were hit that forced them to abandon their short positions (aka "short covering").
And we now find ourselves with 10yr yields under 2%, or aggressively testing 2% in THICK volume. This isn't so much "the breaking of a levy" as much as it is a scheduled opening of the flood-gates. The water is happening to flow in a favorable direction for MBS so far, and current levels are right in the middle of what was on the radar for this week: 2.07 to 1.93 as a core range. That leaves Fannie 3.5 MBS at 103-29, fairly close to the all time highs in the low 104's, but let's not forget that the roll is tonight, so what appears as 103-29 today would really only be 103-20 (give or take) by tomorrow. Even so... good stuff for bond markets, and once again we have Europe to thank.
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| Pricing as of 11:07 AM EST | ||||||||||||||
*Sales up 1.2 pct vs +0.7 pct consensus
Sales. The U.S. Census Bureau announced today that February 2012 sales of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations and trading-day differences but not for price changes, were $409.4 billion, up 1.2 percent (+/-0.5%) from the revised January level and were up 9.3 percent (+/-1.1%) from the February 2011 level. The January preliminary estimate was revised upward $0.3 billion or 0.1 percent.
Inventories. Total inventories of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations but not for price changes, were $478.9 billion at the end of February, up 0.9 percent (+/-0.4%) from the revised January level and were up 9.3 percent (+/-1.1%) from the February 2011 level. The January preliminary estimate was revised upward $1.2 billion or 0.2 percent. February inventories of durable goods were up 0.5 percent (+/-0.4%) from last month and were up 10.2 percent (+/-1.8%) from a year ago.
But European news and Europe-related "risk-off" trading is turning out to be a big factor today in its own right, with any reaction to Friday's NFP simply assumed to be an underlying consideration for the bond market gains. One of the key components in the renewed "risk-off" trading is news that Spanish banks will possibly need more capital.
Volume begat volume and flights to safety in European debt markets begat something similar in domestic markets, but we'd emphasize the somewhat choppy rally this morning. It's indicative of a sort of "indecision about what happens next" combined with an uptick in volume that must naturally follow holiday trading.
So far, it's been good for Treasuries and MBS, but we weren't necessarily destined to improve today. There's more than a little bit of randomness in such rallies and we're consequently not making any assumptions about how long this morning's will last and how far it might run.
Rather, we're content to rely on familiar old mileposts to gauge the broader sentiment. If things weaken, we'll watch 2.04, 2.07, and maybe 2.10 on the upside (in 10yr yields). On the downside, 2.0, 1.98, and then a 1.93-1.95 range which we'd expect to be a hotly contested pivot point that would most likely offer strong resistance--at least in light of the events and data available at the present moment.
10's are currently about 2bps lower at 2.03 and Fannie 3.5 MBS are up 5 ticks at 103-23. The first domestic data of the day is coming up at 10am with Wholesale Trade.