Morning 3-27

Bond friendly news to start your day:

  • Bank of New Zealand held Policy rates steady, but said next move in rates will be lower, joining almost all other major central banks Turing dovish on policy. The Kiwi, Down ~1% vs USD
  • 10-year bund auction saw strong demand, the strongest in over a year as   Germany sold Bunds with a negative yield for first time in 2 years. Let that sink in for a bit very strong demand for paper with negative yield!
  • Draghi said this morning “Progress on reaching ECB’s Inflation goal has been delayed not derailed.” and as a shout out to banks he said may need to soften impact of negative rates.
  • Trumps nomination to be a Fed Governor Stephen Moore, said Fed should immediately cut rates 50 bps.
  • 3mon 10 year yield spread further into negative territory or inversion below last week’s lows. This is the global slowdown barometer
  • Above average volume in the 10s overnight

Not a headline but an Explanation of the Mortgage hedging activity that has helped pressure rates from Citigroup:

   As bond yields fall, some homeowners will look to refinance their mortgages because they can get a better deal. However, that complicates things for investors in mortgage-backed
bonds, because their investment strategies partly depend upon forecasting how many people will pay off their loans early. Refinancing in effect increases the rate of prepayments.
That in turn alters a key characteristic of mortgage bonds: duration, or how much their price reacts to changes in interest rates. Managers of bond investments tend to have targets for
duration, so a shift can prompt some to buy interest-rate swaps in order to hit those goals. Citigroup Inc. strategist Jabaz Mathai believes that is what happened last week when 10-year Treasury yields slipped below 2.5 percent in the wake of the Federal Open Market Committee meeting.


  The sharp move in rates since the FOMC decision “can be attributed to mortgage convexity receiving hedging,” Citigroup’s head of U.S. rates strategy wrote in a March 22 report. The 10-year Treasury yield falling below 2.5 percent “likely triggered convexity flows, which is typically done by servicers, REITs and money managers,” he added. Swap spreads have collapsed across the board, not just one slinked to 10-year Treasuries.


   Spoos Trading down 7 handles near session lows, Both Dax and Stoxx 50 caught a small bid off the Draghi bank Comments but they too trading down on day. Theme for today is slowdown worries. Dec 20  Eurodollars +8 ticks  new contract highs   75% chance for rate cut in Dec  81% in January. Copper sideways stuck in sideways range. Crude a bit heavy due to lower spoos and the API reporting a surprise build in oil stocks. Dollar unchanged

7:30 trade balance data will be watched closely.

Fed Speak:

6:00 PM feds George

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