MBS RECAP: Bonds Rally Despite Weak 30yr Auction

In recent weeks, we've increasingly discussed the concept of "supply."  This has largely been driven by the ramp up in corporate debt issuance creating excess supply in fixed income markets, resulting in upward pressure on rates.  Then, of course, there's the regular old Treasury supply that we see in the form of auctions every other week.  This week played host to the more important of the two cycles: 3yr, 10yr, and 30yr maturities.

These aren't necessarily more important because 10's are the most widely traded global interest rate benchmark, but rather because the 3 auctions are heavily weighted toward the longer end of the yield curve.  One big issue recently is that the corporate debt issuance has also been skewed toward longer maturities--longer than normal anyway.

The takeaway is that traders and companies alike are giving us clues that they are concerned about a long term shift in interest rates.  Those are the times when the longer end of the yield curve sees the least love. 

It was no surprise then, that today's 30yr auction was the weakest of the bunch.  Fortunately for us, it was also the last of the bunch.  Further adding to the sense of relief is the fact that markets worked through the biggest corporate debt deals yesterday, leaving a lighter outlook for the rest of the week.  Long story short, supply pressures eased up a bit today.  It didn't hurt that Germany was out of the office as Europe has been driving much of the recent weakness as well.  But despite all this, it's still far too soon to label this as anything other than a correction in the bigger picture.