The Day Ahead: Pace and Importance of Data Begin Building

On most weeks, it would be fair to assume that whatever the overall pace and importance of economic data might be, that it would begin building right from the start.  The same can't be said about the Monday we just witnessed, which turned out to be the slowest day of the year for many sectors of the bond market.  This isn't too alarming considering there wasn't any major data on the calendar at home or abroad, and although we wouldn't expect any massive movement between now and the big-ticket events of the week, Tuesday should at least offer more opportunity for volume and volatility.

Many of the opportunities for inspiration will necessarily be European in origin, owing to the fact that domestic data is limited to ISM's Services PMI (ISM publishes two "Purchasing Managers' Indexes, one for Manufacturing and one for Services).  Much of the European data will be accounted for by the Markit Services PMI's (Markit and ISM are separate entities, both publishing PMI's), though the biggest single report is Eurozone Retail Sales.  Even then, the highest and best use of Tuesday is likely to be as a placeholder before getting to the meatier data of the week. 

Even if we get some more pronounced reaction to events or headline surprises, we're likely waiting on Thursday's ECB Announcement and Friday's NFP before even beginning to answer the sorts of questions suggested in the following chart:

Seeing as how the above chart contains only 10yr Treasuries, how would we extrapolate the 1.84 level to MBS?  Although there is no hard and fast connection between the two levels over time, at least since the announcement of QE3, yields of 1.84 and below have coincided with an utterly "safe zone" for Fannie 3.0 coupon dominance.  Above there and 3.5's start coming into the picture.  So in terms of rates themselves, a sustained break over 1.84 is a sustained stay in the "mid 3's" as opposed to the "low 3's" that prevailed in late 2012, with "high 3's" starting to take over as 10yr yields move over 2%.  Please note that these generalizations are only as good as the securitization structure is stable.  Future iterations of today's "GSE's"--a topic that's very much on the table--may greatly affect the current relationship between mortgage rates and Treasuries.