Treasuries and MBSs Under Pressure

Treasuries and MBSs are under pressure this morning since the Q4 preliminary GDP came out a lot better than anticipated.  It was expected at +0.4% after the advance report last month was +0.7%, but GDP increased 1.0%. The better read was due to business inventory revisions. It is the second of three for the quarter, with the other release scheduled for next month. Consumption, which accounts for almost 70% of the economy, grew at a 2% annualized rate, down from 2.2% reported in the first report a month ago. There was a revision of personal income for Q3 as well. Higher inventories and net exports drove the positive surprise, which puts 2015 real GDP growth at 1.9% versus 2.5% in 2014. The reaction to the data added additional weakness in the bond and mortgage markets. US stock indexes were better prior to the GDP and added a little more on the report.

Currently at 11:00AM, we have the 10yr slightly up to 1.76% from the open, but definitely higher than the close yesterday, and MBSs are being hit hard at a negative 28 BPS.

Yesterday Treasury was scheduled to auction $28B of 7yr notes but was postponed to today due to technical difficulties. Tuesday and Wednesday the 2yr and 5yr auctions met with good bidding, today’s 7yr should also see a string auction.

Crude oil price up this morning on comments that discussions on production cuts are still alive. Venezuela oil Minister said late Thursday that four oil-producing countries, including his country, Russia, Saudi Arabia and Qatar, will meet again in mid-March. Oil price has been volatile recently as rumors and comments about possible freezes on outputs. The Saudis oil minister said the other day he won’t cut, so the beat goes on - with the price so low in historic perspective traders are unwilling to sell the commodity and that has resulted in firming of other commodity prices. OPEC January production 32.34 mil barrels a day, up 131K barrels in Dec.

Key technical levels being tested this morning as the 20 day average on the 10yr at 1.80%, trade early this morning at 1.77%. The 3.0 30yr FNMA coupon 25 day average 102.24, at 8:30 traded at 102.34. To keep the work bullish, the current levels, have to hold. As I have noted, the work now is neutral in the very near term but I still remain confident interest rates still have room to fall. The economic outlook globally is not good and the US just hanging on. The FOMC will not increase rates and inflation is well off in the distance. Data this week has been mixed - yesterday durable goods orders were stronger than expected. Earlier this week the FLASH services PMI index fell below 50, the first time in three years.