The Day Ahead: Durable Goods and 5yr Note Auction


Yesterday’s rally was impressive inasmuch as it was a calm, directional move to higher prices for MBS (lower yields for benchmarks such as 10yr Treasuries), even if it didn’t boast exceptionally high volumes.  Treasury volume was rather light though MBS markets were able to throw down quite a bit of new origination supply suggesting a lock-heavy day.

We noted on a few occasions that we didn’t see much connection between the scheduled events and the market movement.  At first glance, it looked as ifweaker Consumer Confidence started the move lower for 10yr yields, but more likely, the drop from 2.23 to 2.21-ish just after 10am is the result of a bond market that was ready to rally but had been waiting on the Stock market open and then for any red flags from the day’s major piece of data.  

The tepid report caused no such concerns and the rally merely progressed in exactly the same pace from the previous day.  A failure to break above 2.29 resulted in testing the next lower pivots in the 2.10-2.40 range, first the 2.25, then 2.22, then 2.17, where we finally stopped.  The technical adherence toFibonacci retracements in late March has been interesting for sure.  The next jump would be a big one (if the rally continues) and we definitely wouldn’t rule out some action around 2.13.

There are only two significant scheduled events on today’s calendar: Durable Goods and the afternoon’s 5yr Note Auction.  The former is coming off a rocky print last month, down 3.7% on the headline and down 3.9% in the hefty “nondefense excluding aircraft” category.  Planes are big and expensive, you see…  (I know… we were shocked to learn this as well) and as such, comprise almost 20% of new orders (and about a third of unfilled orders), so occasionally markets might take note of how the report would look through different lenses.  

This is very likely the case tomorrow as aircraft is widely expected to rise.  In fact, Durable Goods almost always rises after being down the previous month.  The chart below shows that adjacent months under 0.0 are uncommon outside the crux of the melt-down.  Markets are expecting a 3.0% gain in the headline but only a 2.0% gain in non-defense/ex-air.  

The 5yr Treasury Note Auction hits at 1pm and is the other big mover of the day.  This could be a bit counterintuitive considering some deductive reasoning that you may have considered.  For instance, if we’re so frequently on about 10yr yields as being this epic benchmark for fixed income, why wouldn’t we be keener on Thursday’s 7yr Note Auction as it’s closer in maturity to 10’s?   A fair question and a good one!  

The short answer is that 7’s are the outcast of the Treasury complex…  They don’t trade in as much volume compared to 5’s.  Heck, they don’t even have their own CBOT Futures chain!  Check it out: No 7’s Here!  It’s not that the 7yr Note Auction won’t be meaningful, just that 5’s are more meaningful despite their shorter maturity versus the 10yr benchmark.

Beyond that, there’s not much else this morning, save for the with-us-as-always MBA mortgage apps, which is more of an industry-related curiosity than a potential market mover.  More inspiring is the scheduled Fed Twist buying in the 2020 to 2022 maturity range (meaning the Fed is buying maturities that should have a default salubrious effect on 10yr benchmarks).  Further rallying in the morning could make the 5yr Auction more challenging, but vice versa if the post-Durables trading is higher in yield.  MBS have major pivots at 102-30 and 102-16+.  

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