Bonds Continue Battle For Lesser Evil

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There’s bad news and not-quite-as-bad news.  Longer-term bonds (the stuff we care about) are either in a modest, steady, long-term uptrend (in rate), or they’re in a more aggressive, shorter-term uptrend.  Actually, they’re currently only truly inside the latter (the worse one), but they’re very close to the gentler trend–perhaps even trying to break into it this week.

This is what bond bulls have been reduced to by late 2017 weakness.  The best we can hope for in the near term is a “less aggressive sell-off.”  The lines in the chart below help visualize the trends.  The yellow lines mark the gentler trend and the teal lines mark the greater evil.  For good measure, the important recent ceiling of 2.60% is marked by the white line.  We definitely want to avoid breaking above there.

The battle between these 2 trends isn’t likely to be decided by scheduled economic data and events.  Momentum in the coming weeks is more likely to be a factor of things like corporate bond hedging (traders selling  and then buying back Treasuries in order to lock in rates of return for corporate clients issuing big bonds), asset allocation (money managers shifting holdings based on client preferences), and strategic positioning (big, for-profit traders speculating on short and long-term trends in rates and the yield curve).

On that note, there are plenty of corporate bonds being issued today, as well as some sovereign debt overnight (Australia) that require hedging in Treasuries.  That can be a confusing concept, but just think of it like a mortgage bank selling MBS to lock in their rate of return when you lock a mortgage.  If they’ve sold your loan at 102-00 today and prices drop (i.e. rates rise), they’re insulated against the losses.

There are a few scheduled economic reports as well, but they’re not typically big market movers.  These include Industrial Production at 915am and the NAHB Housing Market Index (Builder Confidence, basically) at 10am ET.


MBS Pricing Snapshot

Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.

MBS

FNMA 3.5

101-25 : -0-06

Treasuries

10 YR

2.5665 : +0.0225

Pricing as of 1/17/18 9:05AMEST

Tomorrow’s Economic Calendar

Time Event Period Forecast Prior
Wednesday, Jan 17
7:00 MBA Purchase Index w/e 242.7
7:00 Mortgage Refinance Index w/e 1259.2
9:15 Capacity Utilization (%) Dec 77.3 77.1
9:15 Industrial Production (%) Dec 0.2
10:00 NAHB housing market indx Jan 72 74



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