US MBS: Agy MBS strategy team at Citi is moving to a neutral stance on MBS as 10-year Treasury yields are hovering around 1.85%. "Origination is expected to increase at these rate levels and real money buying will likely subside. We also expect a 24% decline in Fed's reinvestment purchases," it said. Although MBS will come under pressure if rates rally further, we think the sector is cheap for investors with a 3 to 6 month horizon. The rally in rates has pushed down yield bogeys and further pushed out the risk to a taper in the reinvestment program. IG spreads are looking attractive but the impending downgrades in the sector will continue to incentivize money managers to own MBS," Citi said.
US TSYS: FTN's JIm Vogel said that there are "uncertainties" in "the next three weeks, including Yellen next week in front of Congress," with her semi-annual economic testimony, and "with less interference from stocks, bonds are giving a clearer picture of what they really feel about the US economy. The big drop in real interest rates tells the story."
US TSYS: Commodity Futures Trading Commission/Commitment of Traders data for the period ending February 2 details: the latest report showed large speculative accounts added shorts/pared longs in Fed funds, Eurodollars, 5- and 10-year notes, while paring shorts or adding longs in 2-year notes, 30-year Bond and the Ultra-bond. In the short end, the group reversed a small long in Fed funds from +1,121 in the prior read to finish -62,786 (-63,907 net) and added to net shorts in Eurodollars by -77,292 to finish -250,693. In notes, the group pared net shorts in the 2-year note by +56,759 to -62,998, and added net shorts in the 5-year note by -56,028 to finish -302,924. The group pared net long in the 10-year note by -38,688 to finish +5,853. In the long end, the group added to net longs in the 30-year Bond by +6,917 to +11,291, and pared shorts in the Ultra-bond by +1,957 to -86,446.
US TSYS: FTN Financial's Jim Vogel said that as financial "markets remain perplexing, here's a (somewhat) helpful thought. Most of the current themes that plague equities and commodities have been in place for quite some time. Everyone was aware of China, the potential for lower oil prices, etc. since the second quarter of last year. Investors were able to look past them because 2016 growth was going to provide a gradual resolution for those thorny issues. Plus, there would be plenty of US growth to allow the Fed to nudge rates higher." But he said that "now, in addition to still flattish global activity and more than a hint of currency wars, investors have to grapple with US growth that at best is substandard. Despite good news on wage growth in January, ISM weakness is troubling. Result: 10-yr UST at 1.85%."
US TSYS SUMMARY: Pt II: 1) Tsys bought in safe-haven bid/vs. sell weak high-yield CDXs; 2) Tsy kept next Tues' $24B 3Y auction unchanged in size but cut $23B 10Y by $1B in size, $15B 30Y by $1B size 3) All await Fed Chr Yellen semi-annual econ testimony on Capital Hill mid-week next week; US Tsys ended Fri 3pm ET vs. 3pm ET Thurs as follows: - The 2-year ended at 0.726% (100-01+) from 0.714% (100-022) - The 3-year ended at 0.901% (100-206) from 0.890% (100-216) - The 5-year ended at 1.252% (100-19) from 1.250% (100-192) - The 7-year ended at 1.584% (101-03) from 1.596% (101-00+) - The 10-year ended at 1.849% (103-18) from 1.865% (103-13+) - The 30-year ended at 2.684% (106-14) from 2.700% (106-03+) - The 2/5-year curve ended flatter at +52.6 bps from +53.6 bps - The 2/10-year curve ended flatter at +112.3 bps from +115.1 bps - The 2/30-year curve ended flatter at +195.8 bps from +198.6 bps - The 5/30-year curve ended flatter at +143.2 bps from +145 bps
US TSYS SUMMARY: Treasuries Fri end mixed after round-turn, 1)Morning slide as mkt overlooked weak +151K Jan jobs to focus on 0.5% Avg Hrly Earngs, lower 4.9% jobless rate; 2) Post-data dip spurred macro buying in Mar 10Y Tsys futures after data (also before); 3) Macros also bought S&P Eminis before jobs, then sold as stocks rose; 4) Better dip buying in Tsys continued thru morning with hedge fund bid in belly Tsy futures, real money bought Mar 10Y, 30Y futures to cover shorts; 5) Traders said Tsy shorts must reign it in before weekend amid such risk as weeklong Chinese New Yr (starts Sun), wknd OPEC meeting between S.Arabia and Venezuela (not too much expected, still a risk;) 6) Some eyed higher US rate hike odds given firm Avg Hrly Earnings; 7) Tsys back in stocks/bonds/oil trade; 8) TIPS trade poorly, even during times Fri when oil improved; 9) NYMEX crude oil slid, off 2.84% recently 10) Weak afternoon stocks, oil spurred Tsys buys 11) Tsys options: large insurance buyers via a +100K Dec 86/87/88/90 put condors at 2; 12) SWaps wider after Thu big widen; payers were Street receiver unwinds amid lack of swappable issuance past wk or so, reduced Tsy 5Y-30Y cpn issuance 13) US 3Y note tight in RP into Tue $24B 3Y (more)
US TSY FUTURES CLOSE: Prices end mostly higher, curve flatter on very strong volume. Mar Ultra bonds closed higher by 15/32 at 168-17 with 96K traded Mar 30Y bonds were up 16/32 at 163-08 with 336K traded Mar 10Y notes were up 3/32 at 130-11.5 with 1.7M traded Mar 5Y note were off 1.25/32 at 121-01.25 with 905K traded Mar 2Y note were lower by 1/32 at 109-12.75 with 325K changing hands.
US DATA: December consumer credit use +$21.3b vs +$17.3b expected. November unrevised at +$14.0b. Revolving credit use +$5.8b after +$6.4b in previous month. Nonrevolving +$15.4b after +$7.7b in November. See MNI main wire.
US TSYS: Treasuries still well bid amid safe-haven bid, 10-year note now at 1.844%. Traders said it's a flight to quality on "widening high yield credit spreads, and weak stocks," plus lower oil, as one put it. "Every day that goes by, someone cries 'uncle,' and unloads some high yield credit," and invests that money into safer Tsys, he added. Meanwhile US stocks keep sliding, with the Nasdaq off 3.22%; and NYMEX crude oil is weak also off 1.07% at $31.38/barrel.
MEXICAN PESO: The Mexican peso has been volatile in recent sessions, falling vs the USD mid week (MXN18.6129 USDMXN high Feb 3) at the peak of risk aversion and then rising sharply as Fed rate hikes were pushed out Thursday (MXN 18.0178 low for USDXMN. At current levels near MXN18.3445, the pair is well down from the life-time highs (life time peso lows) near Mxn18.8024, seen Jan. 21. CIBC World Market's John Welch saw Banxico's statement this week, with its mention of the FX rate as a key concern, as "mildly hawkish as it means Banxico could delink their tightening cycle from the Fed and move earlier." Banxico's decision (o/n rate unchanged at 3.25%) and statement support CIBCWM's view that the central bank will raise the o/n rate by 25bps in March and by another 25bps by year-end. Welch looks for the peso to gradually strengthen, with USDMXN testing Mxn18.0000. "Closing below that level would suggest a further decline to the 17.85 mark," he says.
EURO SUMMARY: *Euro NY Open Feb 5 $1.1194, O/N $1.1184-1.1217, NY $1.1109-1.1246 *The Euro traded in a quiet range in Asia and throughout Europe waiting for the U.S. employment numbers. *The headline number came out on the low side 151k vs. 189k and Euro gapped up to the intraday highs of $1.1246. Seconds later, the market realized the unemployment rate was lower and AHE were higher; the Euro reversed, plunging to new lows at $1.1109 at 10:00 AM. *In addition to Euro-Dollar, there was some aggressive selling in Euro-Sterling. STG.7715 to .7670. *Correlations have broken down today, with most markets moving independently; The Nasdaq is down over 3%, oil is unchanged, and yields have come off to near their opening levels. *Since mid-morning the Euro has traded in a narrow range $1.1126-1.1151. There is solid support at $1.1070, the Feb 4 low, and at $1.1054 the 200 DMA; any bounces to $1.1180/1.1200 should be met with fresh sellers. *Watch China FX reserve Sunday, Feb7, EMU leading indicators. Last Euro $1.1142
US TSYS: Refile: Tsys also see 2/10Y, 2/30Y and 5/30Y curve flatteners. CRT's David Ader and Ian Lyngen said that this past week's "domestic data was generally soft - we're thinking about ISM, PCE, Construction Spending, Productivity - but those were sideshows to the big show" of 151K Jan payrolls report, 4.9% jobless rate and 0.5% Jan. average hourly earnings. "There, the disappointing headline gain was well offset by the drop in UNR, gain in participation and quite strong tone to the wage components. The latter does not change our view on Fed policy going forward, i.e. we don't see a hike until Q4 at the earliest, but it certainly adds further to the confusion between other economic anecdotes and the outperforming labor market," they said. "All things being equal, which is to say if external markets calmer, we'd weigh more heavily into the hawkish side of things given the tone in labor. What we need is simply a few more months of it. By the way, even the tame overall gain has some dubious elements such as the warm weather in December taking away from hiring in January or oddities around seasonal assumptions."
RISK: ***Global investors are jittery into the weekend, fretting pending event risk. There is uncertainty about what Fed Chair Janet Yellen will say about the US economy in her testimony Feb 10-11. Ahead of that, China's FX reserve data for January is due out Sunday (ests look mostly for reserves to decline by -$100bn-$120bn). Then, is lingering talk of a China deval that, despite analysts commentary to the contrary, just won't go away (G-20 meeting of fin mins and CB governors Feb 26-27 has analysts doubting any change in FX policy). BNP strategists say, "The focus of attention is on whether Chinese policymakers will adjust their currency regime over the Chinese new year holiday period. While a devaluation cannot be ruled out, we think China is more likely to opt for a tightening of capital controls near term." The week-long Chinese Lunar New Year holiday begins Feb. 7
US TSYS: Tsys also see 2/10Y, 2/30Y and 5/30Y curve flatteners. CRT's David Ader and Ian Lyngen said that this past week's "domestic data was generally soft - we're thinking about ISM, PCE, Construction Spending, Productivity - but those were sideshows to the big show" of 158K Jan payrolls report, 4.9% jobless rate and 0.5% Jan. average hourly earnings. "There, the disappointing headline gain was well offset by the drop in UNR, gain in participation and quite strong tone to the wage components. The latter does not change our view on Fed policy going forward, i.e. we don't see a hike until Q4 at the earliest, but it certainly adds further to the confusion between other economic anecdotes and the outperforming labor market," they said. "All things being equal, which is to say if external markets calmer, we'd weigh more heavily into the hawkish side of things given the tone in labor. What we need is simply a few more months of it. By the way, even the tame overall gain has some dubious elements such as the warm weather in December taking away from hiring in January or oddities around seasonal assumptions."
OUTLOOK: Global Cal for Mon (GMT/ET) - 08-Feb - China markets closed for New Year's 08-Feb 2350 / 1850* Japan Jan bank lending 08-Feb 0130 / 2030* Japan Dec average wages (p) 08-Feb 0500 / 0000 Japan Jan Economy Watchers' Survey 08-Feb 0700 / 0200 Germany Dec industrial output 08-Feb 0730 / 0230 France Jan BoF business survey 08-Feb 0800 / 0300 Spain Dec industrial output 08-Feb 0930 / 0430 EMU Feb sentiment index 08-Feb 1100 / 0600 EMU Dec OECD leading indicator 08-Feb 1215 / 0815 Canada Jan CMHC housing starts 08-Feb 1230 / 0830 Canada Dec building permits
US TSYS: Treasuries see more buying, 10-year note is at 1.837%. This occurs amid softer US stocks; also weekend risk, such as Chinese New Year beginning Sun, weekend Saudi/Venezuela oil meeting, speculation of selling by sovereign wealth funds/hedge fund selling into stocks, esp. FANG (tech-type stocks).
US TSY FLOWS: ***Creeping bid in Tsys as volatility is not going down due to heavy weekend risk including China New Yr, ccy risk, Saudi/Venezuela mtg, risk of more sovereign wealth fund/HF selling in stocks/rotation out of FANG, and of course Yellen next wk. Global search for yld also aiding long end bid. Price action finally consistent with flows we have been reporting all day, that being, buyers on dips.
US TSYS: Tsys cut losses mildly, in quiet two-way flows with mixed price action; 10-year note is at 1.856%. Mike Franzese, head of fixed income trading at MCAP LLC, eyed today's Jan. jobs report, and said "the global economies are not slowing as much as the doomsayers are stating." He said this could be "keeping the Fed's feet to the fire, and let's get rates normal and restart the American economic engine for the whole world to see. You can't help but to feel American on Super Bowl weekend."
US OUTLOOK/OPINION: Mizuho says "Risk of March rate hike "can't be fully ignored" after drop in jobless rate, spike in earnings. Along with higher 4Q unit labor costs, Jan. labor data suggests Fed is still on track for a rate hike in March."
US TSYS: /TIPS: Traders are disappointed that TIPS today were almost as weak as nominal Tsys despite firmer average hourly earnings within the Jan. jobs report. "TIPS in theory should be flying higher today," said one trader. "But they are matching the selloff in rates, so within a half-basis-point of nominal Treasuries. The fact that oil is above $31 is helpful for TIPS. But they still feel heavy in general."
US TSY/RECAP: US Tsys lower after Jan AHE, up +0.5%, trumped monthly job gains of +151K. Tsys dipped post data but this sparked macro demand in Mar 10Y into and after data on weakness while cash Tsys saw demand in the back end while selling was noted in 5Y. Macro accts also bought Eminis pre data and pitched them out after as stocks rallied moderately. The theme of better buying continued throughout the morning with hedge fund demand seen in the belly of the futures mkt while real money also scooped up Mar 10Y and Mar 30Y to cover shorts. Thought was that Tsy shorts have to reign it in ahead of wkend due to risk including Chinese New Yr and an OPEC mtg between Saudi Arabia and Venezuela, the latter of which little is expected but still a risk. While the odds of a rate hike were perked up a tad post jobs, options players saw large insurance buyers via a +100K Dec 86/87/88/90 put condors at 2.0. US Swap spds wider after massive widening yest. Street having a hard time digesting today's flows, which has been mostly offers and zero retrace of yest move. Ongoing payers said to be Street receiver unwinds amid lack of swappable issuance in the last wk or so and amid reduced Tsy coupon issuance in 5Y-30Y by $1B.
US TSYS: Mesirow Financial's Com Crocker attended an MNI-hosted reception last night with Cleveland Fed President Mester and said "key takeaways" included Mester hasn't seen enough to materially change her "modal outlook", despite recent financial and global economic developments. She also said while short-term mkt turmoil typically doesn't disrupt the consumer, she will be watching that as it can eventually do so, if it persists, he said. Mester also cited that there is lots of time (and work to do) between now and March FOMC meeting, he added. He added that she said that in "my view," that the Fed could stop reinvestments on its balance sheet, "after we have a few more funds rate increases under our belt, perhaps when the funds rate has reached 1% or so."
US OUTLOOK/OPINION: SocGen says "the recent pickup in wage pressures, although modest, confirms that labor slack has largely been eroded. The resilience of core inflation trends reinforces this point. It is troubling that the erosion of slack has continued with very subdued GDP growth - 1.8% in 2016 - which suggests that potential growth is currently running well below 1.5%. This means that the FOMC may have to continue normalizing policy even as the economy continues to produce less-than-stellar GDP performance."
US TSYS/STOCKS: Treasuries hold steady, relatively stable, though trading weaker around the session lows; some support comes in as US stocks indexes keep sliding. Cash 10-year note is at 1.881%. DJIA stock index is off 1.19% at 16,222. Meanwhile crude oil price is off fractionally. Traders report that market players are exhausted.
EGB SUMMARY: German government bonds are trading lower towards the close Friday with the front-end reversing earlier underperformance amid weaker stocks. - Mar Bund opened higher Friday taking their cue from the overnight fall in oil prices and weaker than expected German factory orders data this morning. - Bunds then faded from session highs, seen weighed by rise in oil prices with the Brent April future contract briefly breaking above $35 level. - Range trading ahead of US payrolls followed, albeit in thin volume. - Choppy trading was seen on US Payrolls data, but higher than expected average hourly earnings and lower unemployment rate put Fed rate hike back on the table. - Bunds then bounced on risk-aversion buying as stocks turned lower. - Portugal 10-year yield spread is trading 9bps wider at +281bps as market awaits EU Commission decision on Portugal's 2016 budget proposal. Portugal's Socialist government has submitted E450mln worth of austerity measures vs EU Commission request of E950mln target to meet the terms of the bailout program. **German 2Y Schatz yield is 0.2bp lower at -0.492%, 5Y Bobl is 0.7bp higher at -0.238%, 10Y Bund 0.6bp higher at 0.31%, 30Y Bund 0.4bp higher at 1.03%.
US TSYS/STOCKS: Treasuries see muted mixed trade midday after a chop-a-thon morning and slide on Jan. jobs, then stabilization as stocks and oil weakened; now while stocks are still weak, crude oil is up higher, so Tsys are around the session lows. Cash 10-year note is at 1.891%. "It is Friday and people are exhausted," said one trader.
US TSYS/OVERNIGHT REPO: The Treasury 3-year notes saw more auction-tied demand Friday on ongoing pre-auction shorts, said traders. The shorts are done as a hedge into next week's 3/10/30-year auctions. Meanwhile the Treasury General Collateral Rate was at 0.43% vs. 0.50% Thursday, ahead of the weekend. (More)
US DATA REACT: JPM says "The trade data for 4Q as a whole look slightly stronger than the related assumptions used by the BEA in its advance GDP report from January 29, but we are keeping our tracking estimate of 4Q real GDP growth at 0.4% saar." Export dip was price-related. Imports still trending higher.
US DATA REACT: BAML says there were "negative surprises in all but the labor market" data recently. "Outside of manufacturing, forecasters have been slow to adapt their expectations to reality, reflecting greater uncertainty."
US DATA REACT: CRT says "Trade Deficit widened in-line with expectations in December and printed at -$43.36 bn vs. -$42.23 bn Nov and -$43.3 bn consensus. The drop in exports was -0.3% MoM for the third consecutive decline -- leaving exports at a four-year low."
US TSYS/STOCKS: Treasuries now roughly midrange on the day after a morning slide on Jan. jobs report in two-way flows, then a bump off the lows as stocks, oil weaken. "Stocks and oil are turning" lower, summarized one trader.
US TSYS/STOCKS: Treasuries stabilize at the midmorning low amid mild safe-haven buying on yes, once again, the stocks/bonds/oil correlated trade. Tsys gain on buying spurred by softer stocks and weaker crude oil. Nasdaq in particular is weak, down 1.32% on the day; NYMEX crude oil is off 2.02% on the day meanwhile.
US OUTLOOK/OPINION: FAO Economics chief economist Bob Brusca said Jan jobs report "shows still solid, if slower, job growth. Despite a rise in the participation rate, the unemployment rate fell to 4.9%. That is probably the most consequential development for the Fed." He adds that "job growth is still fast enough to drop the unemployment rate. AHE also moved up rising by 0.3% but there is minimum wage legislation at work as the year starts. Oddly, despite what has been clear and pronounced manufacturing weakness that sector stepped up job growth at 29K in January - a top 10% result since jobs began expanding in this cycle. To balance that, private services jobs gained only 118K a bottom 12% result for the same period."
US DATA REACT: On the January jobs report, Ted Wieseman of Morgan Stanley (MS) says "Unless you think there's a risk they bumble into a policy mistake by adding to the increasingly dubious December rate hike, these results probably don't realistically change March being off the table for the Fed given how poor the overall flow of data has been and rising risks from global weakness and tightening financial conditions." His view is that "The extent of Chair Yellen's dovishness next week will likely be less, though, than if the report had been weaker."
US DATA REACT: On NFPs, RBC Capital Market's Laura Cooper says the slower hiring pace seen in January comes after a "sustained period of exceptionally robust gains that concluded with a solid 262K advance in December." The Fed began to normalize police in December on "this evidence of diminishing labour market slack set against a backdrop of solid domestic activity," she says. The payroll slowing seen today "is unlikely to prompt the Fed to alter their projected course of rate increases," Cooper says. She stresses that the pace of job gains seen in the last 2 years (228K and 251K in 2015 and 2014, respectively) "will become increasingly unsustainable, reflecting a slower rate of increase in the supply of labor coinciding with much of the excess slack in the labor markets being absorbed<" she says. "Nonetheless, ongoing employment gains, more in line with today's report, are still consistent with an economy growing above its potential pace," Cooper adds.
US DATA REACT: On the NFP data, BMO Capital Market's Sal Guatieri notes that aggregate weekly work hours were up 0.4% in January, "after a sizeable gain in December." He says "Even assuming a continuation of the weakest productivity trend in three decades, the upturn in work hours (2.6% annualized from Q4) supports our call for 2.3% GDP growth in Q1 (offsetting the downward risk that was suggested by weaker ISM figures." On the December trade data, he notes that net exports "sliced 0.7ppts from GDP growth in 2015 and will continue to take a toll this year - unless the greenback extends this week's worst slide (4%) in nearly 7 years."
US OUTLOOK/OPINION: Barclays (BCS) analysts called the Jan. jobs report a "confusing" employment report and said they "now look for only two rate hikes in 2016." They said the "establishment survey was weak in January. At an increase of 151k, nonfarm payrolls were softer than our (225k) and consensus (190k) expectations, with the weakness coming in services sector employment. Services sector payrolls only expanded 118k on the month, held back by softness in education services employment and temporary help. Surprisingly, goods sector payrolls expanded 40k, as manufacturing (29k) and construction (18k) payrolls both rose. In contrast, the household survey was quite strong, with employment rising 615k and the unemployment rate declining to 4.9% (4.921% rounded to three decimals), despite another one-tenth rise in participation."
US TSYS: Treasuries chopping lower in post-Jan-jobs reaction as firmer avg hourly earnings and lower unemployment puts the Fed rate hike possiblities back on the table, after the mkt got a bit overdone in recent days on steady Fed hopes. Tsys thus saw front end hurt esp. by sales, including 2-year note, and buying in intermediate and long end Tss, with macro buying in 10Y futures before/after jobs, and macros buying S&P Eminis pre-data then swiftly selling after. Two-way flows cited by many shops included dip buyers in long end, and hedge funds buying in intermediate futures, while real money bought Mar 10Y, 30Y futures around 9:07am ET in short-covering moves. Cash 1-0year note is at 1.887%.
US TSYS: Treasuries slide more after brief stabilization at session lows; cash 10-year note is at 1.881%. Traders cited US and foreign accounts post-jobs doing "better selling in the front end and slightly better buying in intermediates." The two-way flows reflect the varied views on the Jan. jobs report, said one trader. "There are a lot of ways to read the numbers: the 151,000 Jan. jobs headline is weak, but the average hourly earnings and lower unemployment rate are strong" economic data, he added. Plus, "you have remember what elevated Treasuries price levels we had been trading at: we had been pricing in a flipping ease," so the AHE in particular spurred a speedy re-think of the Fed rate hike odds, he said.
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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