MBS MARKET COMMENTARY
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The Treasury market took a breather last week, leaving yields little changed. At 0.614%, the 10-year note’s yield closed a little over a basis points higher than the previous Friday’s level, while the 2-10 spread steepened by about 5 basis points, as the curve “twisted” mildly around the intermediate maturities. With Treasuries settling into trading ranges, their realized volatilities have started to decline.
The Treasury yield curve underwent a “twist” last week, as shorter maturity yields rose modestly while yields on longer Treasuries declined. The 10-year yield ended the week at 0.60%, lower by about 4 basis points, while yields on 2- through 5-year notes rose between 1.5 and 2 bps. The 10-year appears to be settling into a trading range of around 0.50-0.80%, while its 60-day standard deviation is also stabilizing at a little over 12 bps per day, and should start declining as the very volatile March sessions start to roll off.
Intermediate and long Treasury yields declined last week, as the Treasury market looks to be settling into a trading range after a period of extreme volatility. The 10-year yield dropped by about 8 basis points, leaving the 2-10 year spread narrower by about 6 basis points. The decline in the 10-year yield reflected a sharp decrease in the 10-year TIPS break-even (i.e. the projected future inflation rate), which moved in sympathy with weakness in oil prices.
Intermediate and long Treasury yields declined last week, although the extreme volatility in Treasury yields experienced over the last month dissipated a bit. The 10-year Treasury yield ended the week at just under 0.60%, while short yields either closed roughly unchanged (the 2-year note) or rose. (T-bill yields ended the prior week slightly negative, so the increase in the 3-month bill yield to 9 basis points was somewhat welcome.) The back-end rally reflected declining long-term real rates, as the yield on the 10-year TIPS dropped by 15 basis points while the Break-even rate (reflecting expected future inflation) rose by 7 basis points, suggesting that traders are not yet incorporating deflation fears into their thinking.
Treasury yields ended the week lower, although prices spent most of the week in negative territory before a big rally on Friday took the 10-year yield to its lowest level since 3/9. With Treasury bills carrying negative yields for much of the week and the 2-year note pegged in place at around 0.25%, the decline in yields was focused in intermediate and long maturities, leaving the 2-10 year spread flatter by about 10 basis points at +43 bps. (However, if anyone in the future cites last year’s mild yield curve inversion as a factor in the recession we’re likely to see later this year, please instruct them on the concept of “social distancing.”)
Treasury yields were lower week-over-week, but the apparently modest decline in yields does not begin to describe the volatility that the bond markets underwent last week. The chart below, which shows hourly pricing for the 10-year note from 3/13 through 3/20, indicates that the note’s price traded as high as 108-14 (on Sunday night 3/15 in Asia) and as low as 102-03+ on Thursday morning, traversing roughly a 6 ¼ point range over the course of the week. Not surprisingly, realized volatility continued to surge, with the 40-day daily realized vol on the 10-year closing last week at 12 basis points, triple what it was in mid-February.
Treasury yields ended another volatile week mixed, with yields on intermediate and long maturities rising while shorter maturity yields declined. After bottoming out at 0.54% on Tuesday, the 10-year note eventually ended the week yielding 0.96%, although the latter part of the week saw intense intra-day volatility. The rally in the short end of the curve, which pushed the 3mo/10yr spread wider by 40 basis points, likely reflected expectations of a sharp cut in the Fed Funds target rate by the Fed at the 3/18 meeting; the Fed ultimately jumped the gun with a rare (if not unprecedented) Sunday announcement of a return to a 0-25 basis point target. The Fed also announced other measures, including a tepid return of a Treasury purchase program on Thursday and a larger program with the Sunday announcement.
Yields around the world headed lower last week, as the powerful fixed income rally picked up steam. The 10-year note ended the week at a new record low yield of 0.76%, dropping by about 38 basis points week/week. The bond markets were boosted by a 50 basis point rate inter-meeting cut in the Fed Funds target, which sharply boosted pricing in the money markets, highlighted by a 78 basis point drop in the 3-month T-bill rate. By Friday’s close, the Fed Funds futures market was projecting more than two rate cuts at the 3/18 meeting, while Monday’s oil-driven rally has pushed the futures market to project the possibility of the 0% target rate seen from last 2008 through 2015.
The financial markets ended an incredible week with Treasury yields reaching new lows. The 10-year note at a yield of 1.15%, over 20 basis points lower than the previous low hit in the weeks after the 2016 Brexit vote. The 3-month/10-year spread further inverted by about 8 basis points to close around -11 basis points, while the 2-year/10-year spread expanded by 12 basis points to +23, its widest level since early January of this year.
Treasuries steadily rallied last week, with the 10-year note ending the week yielding 1.472%. The drop in yields, triggered by fears that the coronavirus was spreading outside of Asia, was focused in intermediate and long maturities, and left the yield on the 30-year bond at an all-time low 1.915%. The 2/10 year spread ended the week about 4 basis points flatter, while the 3mo/10 year spread inverted to close at -5 basis points. The yield on the 10-year TIPS (reflecting the expected long-term real rate) declined by 6.5 basis points, while the TIPS breakeven level (a proxy for projected inflation) also dropped by about 5 bps.