TRV Weekly Commentary
Week Ending 11 Feb 2015
Week Ending 11 Feb 2015
Comment:
The impressive US non-farm payroll headline defined the week’s risk-on
tone and was the driving force behind the yield curve. January NFPs came in strong
at 257 versus 228 consensus, but more noteworthy was the two-month payroll net
revision of +147k. Yields soared with the 10yr ending the week 27 bps higher, equivalent
to 78 ticks of price decline. Despite higher rates, vol remained stable. We suspect this will be short-lived, as US
headlines will likely take a back seat to geo-political concerns.
With the refi index printing 274 points lower, prepayment fears beyond
the April print have subsided, leaving interest-only paper tighter. Benchmark
FN4 IOs of 13, for example, narrowed 120 basis points. This is equivalent to an
outperformance of 5.4%, erasing half of the January widening. To no surprise, up-in-coupon
trades also performed extremely well. FN 4.5s outpaced the stack, having tightened
12 ticks versus the curve. Additionally, rolls strengthened into 48-hour day
with FN 4.5s increasing 1.5 ticks. For now, the TBA market has been rate-directional.
We would like to point out that convexity levels are much higher: investors
need to be weary of both sharp sell-offs and rallies as convexity hedging may
come into play. We are neutral on the basis for the time being given the
asymmetrical risk.
This week, the market again viewed the world as riskless, as investors
seemed to have forgotten about the global growth glut, declining energy prices
and growing economic frictions within the Euro Zone. We note that we are one
headline from a risk-off market, and even a partial reversal of this week’s rate
movement could reignite refi concerns. Our view is that rate volatility will
increase as we move closer to ground zero of the hiking cycle.
Regards,
Tradex Global Advisory Services, LLC
investorrelations@thetradexgroup.com
203-863-1500
@Tradex_Global
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