US TSYS SUMMARY: Pt II: Tsys ended Mon lower in quiet pre-month-end trading before Tues, March 31st. T-bills got bought to beautify balance sheets, with other minor position tweaks too; some bills had negative rate offers. US 10-year note had a Monday range of 1.975% high (4:28am ET) and 1.942% low yield (10:42am ET). US mutual fund industry watches as Fidelity polls investors on switching 3 prime funds to govt-only funds, see 2;42pm ET Main Wire Story. - The 2-year note ended at 0.587% (99-26+) from 0.583% (99-266) - The 3-year note ended at 0.919% (100-07+) from 0.917% (100-076) - The 5-year note ended at 1.416% (99-256) from 1.417% (99-25+) - The 7-year note ended at 1.750% (100-00) from 1.748% (100-00+) - The 10-year note ended at 1.960% (100-11+) from 1.948% (100-15) - The 30-year bond ended at 2.553% (98-28+) from 2.526% (99-14+) - The 2/5-year curve steepened to +82.9 bps from +83.4 bps - The 2/10-year curve steepened to +137.3 bps from +136.5 bps - The 2/30-year curve steepened to +196.6 bps from +194.3 bps - The 5/30-year curve steepened to +1137.7 bps from +110.9 bps
US TSYS SUMMARY: Treasuries ended Mon lower after 1) Morning data-driven flows: early Tsys selling then dip buying after Feb 0.4% personal income, 2way flow around 3% NAR Feb pending home sales, then dip buying on weak Dallas Fed March Mfrg index 2) Tsys began mildly higher, flatter, then receded; Tsys futures underperformed amid steeper curve 3) Tsy 2Y Futures saw massive midday sale -60k ($12B equivalent; some estimated at -40K or $8B size) in TUM from 109-17 to 109-16.2; 4) Overnight buy QE trade after China hints at easier policy, Austrln mkts digest MNI Insight story saying rate cut possible 5) EGBS aided by QE buys 6) Tsys cd be quiet til Sun tho Fri NFP day; good govt bond month-end extnsns 7) Light technical bid in June 10Y at 128-16 down to 128-15 8) CME block of 5,300 EDM6/H7 (Red Pack:2Y proxy) bought at -1,8:33 am ET 9) Dealers short June 5Y Tsys futures on curve Mon as such rich on qtrend rebalncs as investors moved from cash Tsys to futures 10) MBS tight: better real, fast$ buying and big $2B Fed Op; short squeeze by 1 large acct in 30Y 4.5 MBS roll goes into 2nd wk 12) US swaps favored long 10Y sprds on fly, 5/30Y flatteners into mo-end; carryover vs pvs wk: early bid in 5s/30s spd flatteners, outright 10Y swap wideners
US TSY FUTURES CLOSE: Finish lower/off session lows, curve steeper all session. Latest Jun settles below -- Jun Ultra bond futures down 28/32 at 169-19, 169-10 low/170-14 high -- Jun T-bond futures down 30/32 at 163-15, 163-08 low/164-08 high -- Jun 10-yr futures down 3/32 at 128-19, 128-15 low/128-24.5 high -- Jun 5-yr futures down .7/32 at 120-00.2, 119-30.2 low/120-04.2 high -- Jun 2-yr futures down 1.25/32 at 109-16.2, 109-16.2 low/109-18.2 high
US TSYS: /FUNDS: The U.S. mutual fund industry - and Tsys traders -- will be watching closely, as Fidelity mailed out proxy vote information to see how investors feel about converting 3 prime money market funds into government-only money market funds. The conversion will be voted on May 12th at a special shareholder meeting. Federated meanwhile will be changing the structure of some of its money market funds too, such as adopting a 60-day maturity limit in certain funds. Treasuries traders are watching the matter closely, as it could fuel more demand for the front end Treasuries, said observers. The switch at Fidelity would affect three funds totalling $129 billion. For more please see the 2:42p.m. ET Main Wire Story, "Industry Eyes Fidelity Investor Vote on Govt Money Fund Move."
US TSYS: MS analysts said investors should "cover underweight positions in the belly of the Treasury curve. But we do not suggest overweight positions either. While FOMC participants moved 2016 and 2017 dots lower, the market still prices a much shallower path of rate hikes between 2016 and 2017, making the belly still appear rich to us."
US TSYS: Treasuries waffle around, long end Tsys heaviest with mild losses on 2Y to 7Y notes. But T-bills see buying and some issues have negative rate offer amid "balance sheet window-dressing" needs, said one trader. "The rate is driven because of the balance sheet story" as mkt players sell riskier assets to be holding safe-assets at quarter-end, when balance sheets reflect the latest holdings, he said.
OUTLOOK: Global cal for Tuesday (GMT/ET)- 31-Mar 0000 / 2000* NZ Mar Outlook 31-Mar 0030 / 2030* Australia Feb RBA Private Sector Credit 31-Mar 0130 / 2130* Japan Feb preliminary wages 31-Mar 0500 / 0100 Japan Feb housing starts 31-Mar 0700 / 0300 Germany Feb retail sales, ILO employment chg 31-Mar 0830 / 0330 UK Q4 GDP, BOP, Jan services index 31-Mar 0745 / 0345 France Feb consumer spending, PPI 31-Mar 0800 / 0400 Spain Feb retail sales 31-Mar 0855 / 0455 Germany Mar unemployment 31-Mar 1000 / 0600 Italy Mar flash HICP 31-Mar 1000 / 0600 EMU Feb unemployment 31-Mar 1000 / 0600 EMU Mar flash HICP 31-Mar 1230 / 0830 Canada Jan Payroll employment 31-Mar 1230 / 0830 Canada Jan Monthly real GDP by industry
US TSYS: Treasuries see some more dip buying in quiet afternoon trade, after fairly hefty $8B-size sale in US Tsy 2Y futures; cash 10-year note is now at 1.953%. The Tsys market also sees more sales in 30Y bonds, and 2/30Y steepeners; seems some unwound 2/10Y steepeners fairly recently as that curve's steepness declined quite a bid. Meanwhile the 3/30Y and 5/30Y Tsys also saw steepeners too. US stocks continue to power upward, DJIA is up 1.57%.
OUTLOOK: Analysts at BNP say the "global financial system remains under deleveraging pressure and global savings continue to outweigh investment, which remains bullish for bonds; driving yields ever lower." BNP says slowing US growth in Q1 and Fed's decision to downgrade projections are positive for bonds. "This dovish backdrop for Q2 creates an environment for lower US Treasury yields, loss of support in the upward momentum in the USD and support for US equity and credit markets."
US TSY FUTURES: Further details on the 40,000 Jun 2Y Tsy futures sale cited in 12:02pm ET bullet; that works out to a nominal US$ equivalent of $8.0 billion, said observers. Meanwhile the cash Tsys market sees 2/10Y, 2/30Y and 5/30Y steepeners going on today. US stocks are firming: DJIA is up 1.57%, S&P 500 is up 1.05%, Nasdaq is up 0.92%.
US TSYS: Treasuries hold a tight mainly lower price range, which follows the big sale of 40,000 Jun 2Y futures cited in 12:01pm ET bullet. "That was a big trade," said one trader. The Barclays (BCS) asset allocation team also adds that "the Fed's delay (in tightening US policy) provides a good entry point for a strategic long in the USD and inexpensive bearish positions in US long end fixed income. Go short GBP/USD and position for USD 2/30s 3yf steepeners."
US TSYS/RESEARCH: Barclays (BCS) asset allocation analysts "present various trade ideas that hinge on the key asset allocation themes discussed in the, 'Global Outlook: Oil, the dollar and monetary policy: it's all (or at least mostly) good.'" They said that "more stability in both the dollar and oil prices and plenty of monetary policy accommodation make for a supportive environment for financial markets." They "favor high-yielding fixed income assets. Go long US and euro area high yield credit. We also suggest investors go long US vs. euro area IG credit."
US TSYS SUMMARY: Treasuries held a tight mixed range midday Mon with 1) Morning data-driven flows: early selling in Tsys then dip buying after Feb 0.4% personal income, then 2way flow around 3% NAR Feb pending home sales, then dip buying on weak Dallas Fed March Mfrg index 2) Tsys began mildly higher, flatter, while Tsys futures underperformed amid steeper curve 3) Overnight buy QE trade after China hints at easier policy, Australian mkts react to MNI Insight story saying rate cut possible 4) EGBS aided by QE buys 5) US$ firmer vs. other majors, US stocks gain 6) Tsys cd be quiet til Sun tho Fri key NFP day so mkt eyes good month-end extensions in most govt bonds except UK 7) Light technical bid in June 10Y at 128-16 down to 128-15 8) CME block of 5,300 EDM6/H7 (Red Pack:2Y proxy) bought at -1,8:33 am ET 9) Dealers short June 5Y Tsys futures on curve Mon as such rich on qtr-end rebalances as investors moved from cash Tsys to futures 10) MBS tight: better real and fast money buying and large $2B Fed Op; short squeeze by one large account in 30Y 4.5 MBS roll goes into 2nd wk 12) US swaps favored long 10Y sprds on fly, 5/30Y flatteners into mo-end; carryover vs pvs wk: mild early bid in 5s/30s spd flatteners, outright 10Y swap wideners
US TSYS: Treasuries see quiet two-way flows on this holiday-shortened week, which has an early close this Good Friday after March jobs report. Treasuries saw early selling and then dip buying after Feb 0.4% personal income, then muted two-way flows around the 3% NAR Feb pending home sales, then steady quiet dip buying after the weaker Dallas Fed March Mfrg index. On the holiday schedule: the cash bonds mkt will close at noon ET on Fri, April 3rd; while financial futures thus will close on the CME at 11am ET (10am CT). All this of course follows the 8:30am ET March jobs report; the MNI poll has a median estmate of +241K US NFP, 235K private payrolls, 5.5% jobless rate, 0.2% hourly earnings, 34.6 hours avg workweek.
FED: VC Fischer speaks this evening on "Nonbank Financial Intermediation, Financial Stability, and the Road Forward" at the Atlanta Fed Mkts Conference. Sources note that in WSJ Fischer wrote about 'Shadow-Bank Risks.' See http://blogs.wsj.com/economics/2015/03/27/feds-stanley-fischer-urges-vigilance-o n-shadow-bank-risks/
US DATA REACT: Pantheon Macroecon says the 3.1% "increase in Feb pending home sales points to a huge surge in existing home sales in March, to perhaps 5.2M from 4.88M in Feb, putting sales at their highest level since Sep 2013." This might not be a false dawn- better pace of payroll growth "means that the pool of prospective homebuyers is now rising more rapidly than at anytime since the crash." HFE says sales trend in homes is up modestly. BMP warns that the +11.6% in MW could reverse in March.
EGB SUMMARY: German government bonds are trading mixed towards the close Monday following 2-way session, with long-dated issues outperforming on duration month-end buying. June Bunds opened little changed but then came under pressure after stronger than expected German Mar Saxony state CPI data and Spain's Mar flash HICP data showed decelerating disinflation. A reversal higher was then seen on duration month-end buying, with talk of ongoing ECB QE buying. Traders then reported real money accounts lifted Bunds, while macro account bought German 5-year Bobl to sell 5-year Gilts. Another fade lower was then seen as UK Gilts came under pressure on talk of hedge-fund selling and extended recent profit-taking seen at the end of last week. Moreover, upbeat Eurozone economic sentiment index (ESI) with bonds also weighed by gains in stocks amid market talk that China's PBOC is to hold a press conference to ease admin curbs on home purchases -- later confirmed and was first coordinated intervention by PBOC and Ministry of Finance that underpinned risk-on trades. Volumes were thin ahead of quarter-end, Japanese fiscal year-end along with the shortened Easter trading week. The German 10-year Bund yield is unchanged at 0.206%.
CHINA: Rather than rate cuts, Carl Weinberg of High Frequency Economics looks for the next move by the PBOC to be a reduction of banks' required reserve ratio. "We expect more reductions in the required reserve ratio as the PBOC is pressured to support a recovery of economic growth and as outward investment flows accelerate, drawing down the stock of foreign exchange reserves," he says. Q1 GDP is due out April 15, Weinberg notes, with the next reading on FX reserves out due out some time ahead of that. "We think the next chop at the required reserve ratio will be coincident with these two reports - Watch out," he warns.
US DATA REACT: Barclays (BCS) says Pending home sales rose 3.1% in Feb, well above expectations. "The unexpected strong performance came from a surge in pending sales in the Midwest (11.6% m/m, previous: -1.1%) and West (6.6% m/m, previous: 1.6%) regions." The release "bodes well for total home sales in Q2."
US DATA: Mar Dallas Fed Mfg Survey text: "Texas factory activity declined in March, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, fell to -5.2, posting its first negative reading in nearly two years. Other measures of current manufacturing activity also reflected contraction in March. The new orders index pushed further into negative territory, coming in at -16.1, and the growth rate of orders index remained negative for a fifth consecutive month but edged up to -15.3 in March. The shipments and capacity utilization indexes slipped to more negative readings, -8.7 and -6.4, respectively. Perceptions of broader business conditions were rather pessimistic for a third month in a row. The general business activity index declined 6 points to -17.4 in March, while the company outlook index was largely unchanged at -4. Labor market indicators reflected slight employment declines and shorter workweeks. The March employment index dipped to -1.8, its first negative reading since May 2013."
US MBS: Agy MBS strategy team at Morgan Stanley (MS) recommends new production 30Y 3.5 Ginnie Mae pools. It says it has been recommending for some rotating out of 6-14 WALA GN2 and FN 3.5s in pool form "as these are the fastest-paying cohorts" and getting into new production GN2 3.5 pools "as the new prod pools would have both a higher concentration of FHA and a higher concentration of 85 MIP collateral within FHA, both of which would call for a better convexity profile." MS says the GN2 March production data supported this trade idea as FHA concentration went from 37% to 56% and 85 bp collateral made up nearly 40% of FHA. "April pools should have even higher concentrations of FHA and 85bp collateral," MS says in weekly research report. "Being long new prod GN 3.5 pools has become our highest conviction trade idea, as March and April GN 3.5 pools will have a much higher percentage of FHA loans and a much better convexity profile as a result. We recommend being long GN 3.5 new prod pools relative to FN 3.5s," MS says.
US TSYS/OVERNIGHT REPO: The overnight repo market Monday saw the 2-year Treasury note and 10-year note all trade tightly at negative rates. However the 5-year note special waned after a few weeks of tightness, said traders. Traders prepared for the quarter-end and month-end and Japanese fiscal year-end, while the Fed did its second longer-term reverse repos; but Monday saw a $101.3B 7-day reverse repo as opposed to the expectation of $125B 7-day reverse repo.
OUTLOOK: Citi "have once again cut our 2015 global growth forecast (to 2.9% versus 3.5% a year ago). Within that, the differential between the advanced economies now looks to be narrowing on the back of divergent monetary policies."
US DATA: Feb Pending Home Sales Index +3.1% to 106.9. It is +12% yoy and now has increased year-over-year for six consecutive mos. Demand seen strengthening due to better labor mkt, low rates, rising rents causing more to buy. Share of first-time buyers increased slightly for the first time in February since November 2014, up to 29 percent from 28 percent in January. PHSI in the Northeast fell 2.3 percent to 81.7 in February, but is 4.1 percent above a year ago. In the Midwest the index leaped 11.6 percent to 110.4 in February, and is now 13.8 percent above February 2014. Pending home sales in the South decreased 1.4 percent to an index of 120.2 in February, but is still 10.8 percent above last February. The index in the West climbed 6.6 percent in February to 102.1 (highest since June 2013 at 111.4) and is now 18.3 percent above a year ago.
US AGENCIES: /US PIPELINE: Fannie Mae (FNMA) is scheduled Wed to announce its Benchmark Note issuance decision. The agency passed on its previous three calendar slots and last priced $3 billion of 5-year Benchmark Notes in early Jan at T+15.5. Those notes were last bid 5 bps tighter than that level, per one broker screen.
US DATA REACT: MS says after PCE data, "We now see Q1 consumption tracking at 1.9% instead of 2.1%, which builds in a stronger 0.3% gain in March real PCE. That lowered our Q1 GDP estimate to +0.8% from +0.9%." For core PCE prices +0.13%, "annual rate will likely resume moving lower in coming months; 0.1% monthly gains over the next four months would leave the year/year rate at 1.1%." Jefferies says "PCE Deflator has been below the Fed's 2% target since April 2012. Today's data offers no significant sign that an acceleration towards target is coming any time soon."
MNI: With the recent outperformance of 30Y FN with 4.5 coupon, the agency MBS team at Citi now thinks they look fairly priced while 4s are rich. "Although FN 3.5s look rich when we assume 2014 as the deliverable, we like being long the coupon for June settle when the Fed will have bought another $12-15bn of bad bonds in the coupon and cleaned up the float," Citi says. Prepayment reports coming out next Monday afternoon. "The recent rally in rates has driven speeds of cash window pools noticeably higher than non-cash window pools for cohorts such as 4s of 2013," Citi says, adding that this is occurring due to the fast prepays on cash window servicers like Pingora, RoundPoint and Stearns Lending. "The importance of these servicers on cohort level speeds is reflected by the fact that RoundPoint and Pingora rank as top 5 servicers for 30-yr FN loans originated in 2014 while Stearns lending is a top 10 servicer. Prepays on in the money loans serviced by these servicers are 5 to 10% CPR faster than bank servicers."
US TSYS/RESEARCH: /EGBS/JBGS: MS analysts led by Matthew Hornbach "turn neutral on duration outright" in Treasuries "but reiterate our suggestion to buy 10-year Treasuries against selling 10-year German Bunds. We also suggest investors sell 10-year JGBs against 10-year USTs, but we suggest selling twice as many JGBs as 10-year USTs in order to reduce the directionality of the trade. We're all about those bonds, 'bout those bonds, go global."
In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.
Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.
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