Never a time to sleep
Posted by Eric Skates on
It doesn’t quite seem this way given a decent bump in yields this week, but the market has been in Holiday mode for sure. In fact, that’s mostly why we’ve seen the bump. There’s not a ton of liquidity and bid/ask spreads have been consistently 2-3 ticks. A really poor 5 year auction yesterday afternoon was the icing on the cake. I wouldn’t worry too much about these levels. We are up against some interesting levels though. 2.32 is a pivot and we’d really like to finish the week below that level. We’ve supported that level a couple times already, but not convincingly, so I do have some concern around that. Additionally, we are getting to some scary levels on the 5’s. Part of me dismisses that, because we should be curve flattening and arguably heading towards an inversion if the Fed raises a bunch of times and the data keeps worsening. That said, 5’s are a super important maturity and therefore a move up could have negative near term implications for 10’s.
Here’s the bottom line, this weeks action is likely irrelevant. I wouldn’t necessary lock a pipeline today and tomorrow. I would consider ejecting on some near term closing here just in case, especially if yields drop to around 2.25.
I see the likely scenarios as follows:
We close the year around 2.37 and rally on Monday (25%)
We stick just below 2.32 and improve a bit on Monday (60%)
We follow support 2.32 and bounce nicely before the curtain closes on 2015 (15%)
I really don’t see a spiral into the abyss as a likely possibility. My only caveat is that a bigger bounce could likely be contained by the impending NFP next Friday. So I wouldn’t expect 2.12 before that. My final thought is that the action around NFP recently has been selling off a few weeks prior, rallying into the number and finally reacting to the number. So I wouldn’t rule out 2.21 before Friday. Locking at those levels is pretty much the only option IMHO.
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