A Record $115Bln Being Issued: Watch The Bond Markets
A: Just talking out loud here. Now that the credit indicators have come in big time and it seems lending rates are once again following the bond markets, I would keep an eye on those markets this week; especially if you are considering a rate lock. The 10YR yield has quietly risen about 20 basis points in the past week, likely in response to two factors: anticipation of the upcoming record treasury issuance + a shift into stocks as the rally's momentum continues. As always, the markets have a way of equalizing themselves when one move gets a bit long in the tooth. We may have the makings of an interesting bond market week, similar to late May when fears over auction demand rattled the markets for a few weeks. Combine concerns over record supply with a strong move in equities recently, and you could see the setup that may lead to a repeat of that pattern.
Mortgage rates are tied to the price of mortgage bonds (read Dan Green's 'Where Do Mortgage Rates Come From?' for more on this) but more investors tend to look at the treasury market rather than what the FNMA 30-YR notes are doing intraday.
But when the treasury market sees a big move or intraday jolt from an auction gone bad, it could quickly affect the mortgage markets by sending rates higher and hurting consumers that are not locked and lenders that are committed but not hedged. It may also cause bottlenecks and slow the backlog of loan processing. On May 29th, The MortgageMan explained his wildly volatile week like this:
"This week might have been the most volatile period of time I've ever seen in the mortgage markets. Not only did I watch interest rates soar from 4.875% to roughly 6.25% in under 4 days, but I now find myself asking the billion dollar question: What's next?"
At that time, treasury issuance was enormous and the market overreacted on the concern. Next weeks $115Bln of planned auctions is even higher than that week! So yes, its worth keeping an eye on given the record treasury supply on tap.
Via Bloomberg, "U.S. 10-Year Note Falls Most in 7 Weeks as Record Supply Looms":
Treasuries declined, with 10-year notes falling the most in almost seven weeks, as stocks rose and the U.S. announced plans to sell a record $115 billion in notes in four auctions next week.Watch how equities relate to the bond markets reaction to this supply. Will failed auctions rattle equities given the huge moves recently? Or, will the very short term trade/momentum remain intact as the play is to continue to sell treasuries + buy stocks until the market 'finds that right yield', as Charles Comiskey states. If that's the case, traders will be watching the bond market very closely to see when investors may flock back to the safety of now higher yielding government paper. Should equities be even higher at that point, you may see another shift out of stocks and into treasuries.“The amount of supply needing to be sold still carries a lot of shock value,” said Eric Lascelles, chief economist and strategist at TD Securities Inc. in Toronto. “Throw the stock rally on top of that and you have a good argument for selling Treasuries.”
“Taking down supply hasn’t been an issue, but it is another $115 billion in paper,” said Charles Comiskey, head of U.S. Treasury trading in New York at primary dealer HSBC Securities USA Inc. “That’s a lot of paper, so the market will have to find the right yield.”
Harmonic how markets work sometimes as this was the exact case in late May to early June leading Mish to write about the "Mortgage Markets Locking Up": first sell treasuries and buy stocks and then when yield gets to where it needs to be, sell stocks and jump back into treasuries. This is not a prediction, just an observation that the setup may be there for this pattern to repeat itself.
On the flip side, should the auctions be oversubscribed you may easily see equities rally even further as a sign of confidence that the treasuries record need for money is resulting in no problem from the markets. Either way, its worth keeping your eyes pealed.
