Market Snapshot January 10, 2018


Good Morning on this fantastic Wednesday,


Bonds are hurting today (and stocks are also in the red). The 10-yr is at 2.59% and at the top of the new and higher range. Mortgage bonds are -37bps from yesterday’s close. About half of that is from bond rollover, so really doesn’t count towards pricing. Still leaves us down too much. There is no real economic data to support it so I have to question it. There are two prevailing sentiments out there. Unfortunately, no crystal ball. I’d prefer to side with the glass half full.


The first is a bit more negative and goes..  Many traders are urging caution and governments are flooding the market with paper over feared we could be the final days of a three-decade bull bond market. European debt securities and U.S. Treasuries were relatively steady ahead of a sale of more than a combined $30 billion worth of bonds expected to be sold by the U.S., Germany, Italy and Portugal. Sentiment was fragile, with billionaire fund manager Bill Gross saying on Tuesday that bonds have entered a bear market, noting that 25-year trend lines had been broken in five- and 10-year Treasury maturities (not sure this is true as we still have not taken out the 2016 10yr Treasury highs of 2.62%). DoubleLine Capital Chief Investment Officer Jeffrey Gundlach said markets had not priced in shrinking central bank balance sheets (this is more likely true). Debt markets are being weighed down by prospects of central banks in Europe and Japan moving away from their stimulus plans. The U.S. Treasury auctions $20 billion of 10-year debt in a re-opening later in the day. This will be very interesting to watch as we are very oversold and if yields rise too much it would put a halt to growth momentum and slow down the Fed hikes and stock market performance — and then put a break on the bond sell-off. That is the bad which could take the 10yr to 2.70% or higher (rates would jump another .25%)


The glass half full side which I have more confidence in (paraphrasing and appending Dan Rawitch). Huge gap down this morning and the reason is ridiculous and therefore not sustainable. Also, yesterday was a bond rollover day, which caused a small impact to the chart. There was an article that talked about the possibility of China punishing us by not buying our bonds. Well, La de da and who cares! (great line) They’ve only been on a cycle of buying on average $88 billion of our bonds and this is a drop in the bucket relative to our overall bond market. It is not enough to move bond prices! So, what we have is an emotional and temporary reaction. I believe this gap will close. It may not fully close today, but it will close and we will see a correction that will take us back to the mid 102’s (an improvement of 60bps or so from where we are now) in the days to come. This is highly dependent on Cpi and retail sales which we will see on Friday. Later today we will have 10 year treasury auction, hopefully this goes well and helps close the gap! Hopefully today (and yesterday’s moves) have been a sell the news and buy the data scenario but relying on that old high school supply/demand curve I would think that at least some of the move has been real and not emotional.


Tomorrow we do get some data PPI and Unemployment claims carry the most weight. Friday is Retail sales and CPI which can both move the markets. Interesting place to start the year. A question to ask is that if rates (the short and long end of the yield curve) continue to push up organically, will the fed need to move short term rates again in March?


Make today great!