Good Morning … Mortgages were mixed into the close yesterday with FN30yr 3.5% in Jan finishing unchanged (104-06), PC30yr 3.5% in Jan lower by .5 of a tick (103-30) and GN30yr 3.5% in Jan closed down 2.5 ticks (104-26). On Monday, mortgages finished a tick tighter (outperform) to treasuries due to low volatility, strong carry and Fed buying. Origination volumes were at ~$1.3 billion on the day. Yesterday, the US Treasury sold $27 billion in two-year notes at a high yield of 0.703%. The gap between the two-year note and 30-year bond yields narrowed to 208 bps, its lowest level since January 2009, producing a flattening in the yield curve. The yield curve plots the rates of bonds of the same quality, but different maturities. It flattens when yields on shorter-maturity notes rise, those on longer-dated bonds fall, or when both happen simultaneously. Analysts expect a flatter yield curve in the coming weeks as yields at the shorter end of the curve price in the Fed’s first rate increase in 2015 and the longer end of the curve remains low due to inflation. Indirect bidders (an investor class which includes foreign central banks) purchased ~35.7% of the two-year notes, compared to an average of 32.1% for the past 10 auctions. Direct bidders (an investor class made up of non-primary dealers that place their bids directly with the Treasury) made up only 14.5% versus an average of 18.3% at the past 10 sales, leaving 49.8% for the primary dealers. The bid-to-cover ratio was 3.24 compared with an average of 3.4 for the previous 10 auctions. (The bid-to-cover ratio gauges demand by comparing total bids with the amount of securities). The US Treasury will sell $35 billion in five-year notes later today and $29 billion in seven-year notes on Wednesday. Benchmark 10-year notes were up by 3 ticks (2.164%) on the day. Equities continued to rise for a fourth day as investors flocked to riskier assets in Monday’s trading session. The Dow closed higher by +154.64 points to 17,959.44, and the S&P was up slightly by +7.89 points to end the day at 2,078.54. Treasuries are opening lower again this morning ahead of this afternoon’s auction and economic data may show the US economy grew at a faster pace than expected. The 10 year note is currently down by -2.5/32nds at a yield of 2.171%. Futures are pointing higher with the Dow up by +29 points and S&P is higher by +2.4 points.
Posted on: Tue, 23 Dec 2014 16:20:39 +0000
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