Good Thursday AM,

Dan Rawitch shared a good piece this a.m. “It is nice to post more positive news about bonds. The trend is strong, and the volume is climbing alongside the price. Think about an airplane, it can climb on low airspeed for a short period of time but soon, it will stall out and nosedive. Price is the plane and volume is the throttle. The throttle is pushing us upward. The pattern on MBS is forming a cup which is very bullish. It may now start forming a handle to go with the cup. Visualize a cup and think about how the handle goes down below the rim of the cup. A cup and handle is about the most bullish formation we trade. When the price breaks above the rim of the cup… OMG, things really run. That said, we need a few slightly down days to form the handle. If we see some downward movement on low volume, that will be your handle and then look out above. We now know the Japanese have been dumping our bonds and we also know they are at the end of their selling spree. We also have the end of the quarter coming and this will create the big funds to start rebalancing. This will require them to liquidate billions in stocks and to acquire billions in bonds. I suspect this is why the FED may not be as concerned as they should be with the ending of the SLR exemption. I hope they are right and that the banks do not sell too much into the funds that are buying. It will be an interesting few days. I expect the rally to continue but I am looking for a small pull back in the next couple of days.

It is hard to know exactly how much “love” is left for rates, but anything more than “none” would go a long way in helping solidify the recent ceiling at 1.75%, and perhaps even catalyzing some momentum back in the other direction.  Early April will be an important time frame as well, in the event we hear about a big shift in Treasury trading preferences as Japan begins a new fiscal year.

In a page from ‘rates can always be lower (you just need to move to Europe)’: with negative rates, some homeowners in Europe are paid to borrow. The upside-down relationship with lenders started years ago when the European Central Bank cut interest rates to below zero to reignite the continent’s frail economy in the midst of a sovereign-debt crisis. The negative rates helped everyone get cheap financing, from governments to small companies. It gave an incentive to households to borrow and spend. And it broke the basic rule of credit, allowing banks to owe money to borrowers. After the ECB cut interest rates to below zero in 2014, economies in the Eurozone improved and expectations were that rates would rise in a few years. But the coronavirus pandemic changed all that. As economic pain in Europe drags on, the negative rates remain—and they are getting lower.

Please remain safe and healthy, make today great.