Buyers Still Alive, But Still Waiting to Charge


Yesterday’s recap is a good read if you didn’t happen to catch it.  Here’s a link.

In general, there are 2 things going on with rates right now. 

1. confirmed uptrend beginning in mid-December and still intact

2. lurking buyers potentially getting closer to buying after a break to the highest levels in more than a year.

Actually these 2 things are always going on with rates if we reduce them to their categories.  If we did so, they would read:

1. currently confirmed trend (aka “what’s actually happening”)

2. potential changes to that trend (aka “what might happen”)

As has been the case in recent days, bond markets are trading for reasons that transcend most any economic data or news headline.  The exception would be news headlines for traders focused on corporate bond issuance or technical analysis.  

The flood of recent corporate bond issuance is bordering on biblical after yesterday saw more than $24 billion hit the market.   Forget the esoteric “rate-lock hedging” discussed in our corporate issuance primer, that’s still $24 billion in bonds that compete with Treasuries and MBS for investors’ dollars and attention.  Those deals are far more enticing and exciting to get in on, so it’s no surprise to see a fair amount of hesitation among buyers in Treasuries and MBS, despite levels that should be enticing in their own right.

As for those levels, we’re talking about 2.62-2.64% in 10yr yields at the moment.  After seeing the following chart, they don’t need much more explanation.

I’ve watched markets a bit too closely for quite a while and I can tell you the current shape of trading makes it unlikely that we’ll see a major bounce that falls perfectly on this 2.63% line.  The caveat is that the collective unconscious of the financial market is always looking for a way to do something unexpected.  So there’s always a chance that we see a “triple top” in yields, despite such events being tremendously uncommon.

If we don’t see a perfect triple top, don’t lose hope (I’ll let you know when it’s time for that).  History suggests the ceiling level is still important as a sort of line in the sand, above which, traders become more interested in buying bonds again.  But let’s not get ahead of ourselves.  Until and unless yields break convincingly above 2.62-64% (I’m going to call this 2.63% from here on out), we can continue to hope for that triple top.  And if you’re not into “hope,” we can simply continue treating it as an important overhead technical level.  

From a lock/float standpoint, almost any risk profile suggests locking amid this extended uptrend in rates.  Only the most risk-tolerant folks would have considered floating yesterday.  If you find yourself floating, it’s hard to make a case for continuing to do so upon a break over the ceiling.  The collective unconscious knows this though.  If you’re really not in the mood to lock, the market might try to force your hand with a break to, say, 2.65% only to turn around and rally from there. 

All that to say the following: lock triggers can arbitrarily be set slightly above the established technical levels in order avoid locking too early.  This assumes that you or your client are in a small group of the exceptionally risk tolerant.  If the bounce doesn’t materialize, it’ll cost that much more to lock after the next negative reprice.

Original Source