The Week in Review/Week AheadThe Week in Review: 100-Year Flood Rattles Treasury Market
Analyst: Jonathan Garber
The Week Ahead
- Treasuries booked gains amid an historic week.
- On Wednesday, the complex saw its equivalent of a 100-year flood as a 10 sigma move pushed long dated yields lower by as much as -34bps.
- A comparable move would be an ~14% move in the S&P 500.
- The plunge in yields made for the biggest one-day range for yields since the Fed announced its $1 trln asset purchase program on March 18, 2009.
- Yields spent the rest of the week repairing the damage with both the 10Y and 30Y recouping all of their losses and then some.
- Contributing to the selling were Ebola fears, continued weakness in the German economy, and a jump in peripheral yields that was brought on by reports the Greek government is considering an early exit from its IMF rescue.
- Economic data was mixed. Retail sales (-0.3% actual v. -0.2% expected), PPI (-0.1% actual v. 0.1% expected), Empire Manufacturing (6.2 actual v. 20.4 expected), and building permits fell short of expectations while industrial production (1.0% actual v. 0.4% expected), capacity utilization (79.3% actual v. 79.0% expected), Philly Fed (20.7 actual v. 19.8 expected), housing starts (1017K actual v. 1013K expected), and Michigan Sentiment (86.4 actual v. 84.0 expected) beat.
- Up front, the 2Y fell -5bps to 0.379%. The yield pressed below support in the 0.400% and 0.300% areas before bottoming at May 2013 levels near 0.200%.
- In the belly, the 5Y tumbled -11bps to 1.420%. Action tested the 1.100% level before rallying over the second half of the week. The 1.450%/1.550% area will be key in the days ahead.
- The 10Y fell -9bps to 2.199%. Early in the week bond guru Jeff Gundlach suggested the benchmark yield would bottom in the 2.200% area. However, that prediction would be proven wrong rather quickly as Wednesday's rush to safety dropped the benchmark yield to a low of 1.868%. The yield hit levels last seen in May 2013 before rallying sharply.
- At the long end, the 30Y lost -6bps to 2.968%. Wednesday's panic flushed the yield to a more than two-year low of 2.677%. Sharp selling over the remainder of the week produce some prints above the 3.000% level before slipping a bit into the weekend.
- The yield curve saw a mixed week as the 2-10-yr spread tightened to 182bps and the 5-30-yr spread widened to 155bps.
- There is no data on Monday.
- Tuesday's data is limited to existing home sales (10).
- Wednesday will see the weekly MBA Mortgage Index (7) and CPI (8:30).
- Thursday's data includes initial and continuing claims (8:30), FHFA Housing Price Index (9), and leading indicators (10).
- Data concludes for the week on Friday with new home sales (10).