The Week Ahead: Limited Data, More Earnings, Debt-Ceiling Surprise

With around one month left before hitting the debt ceiling, markets were geared up for a sideways grind, dominated by political uncertainty.  Much like markets were waiting for whatever Fiscal Cliff news they could get in December, so too did we expect to be waiting for "something" to happen in late February.  The intervening time--even if not preoccupied with the particulars of the politics--would nonetheless be more muted... more contained... simply waiting to "move on."

But in a break from the Fiscal Cliff screenplay (which saw incessant delays and the aggressive pushing/breaking of deadlines), House republicans say they will vote on legislation on Wednesday to extend the debt ceiling deadline until May 19th.  House Majority Leader Cantor alluded to the legislation on Friday afternoon, but markets didn't do much with the info at the time.  Perhaps the three day weekend was too close at hand for any major reaction.

Or perhaps markets just don't care...  To be fair, we think they care, but only inasmuch as "something" actually happens.  In that sense, the arguments for a more muted, contained range ahead of Debt Ceiling news would still make sense until at least Wednesday.  If the House passes the legislation, it will likely be taken amount to a net negative for bond markets, but it wouldn't be a sweeping defeat.

More of a risk than any quick, ugly sell-off's spurned by debt ceiling politics is the long, slow sell-off that's been intact since the summer of 2012.  This isn't as readily felt in the mortgage market due to the timing of QE3, but it's been there.  As the relative performance of MBS vs Treasuries has calmed down a bit since QE3, we're back to moving in concert with Benchmarks, and that's been mostly unpleasant if you like low rates.

With limited data on tap this week, bond markets could continue to play defense against the notion that the global economy is somehow "fixed."  Of course, it's not really fixed, but keep in mind that there has been a big premium in global "risk-off" demand (US Treasuries, German Bunds, etc...) for both panic and uncertainty.  We wouldn't need to be headed convincingly toward near-term economic prosperity in order for that panic/uncertainty premium to be peeled away slowly.  Indeed, that's what's been happening, and that's why 10yr Treasury yields are closer to 2.0 than 1.5.  We'd continue to plan on the longer term trend staying intact until/unless it's convincingly broken.