Brian Reynolds on Treasuries
We took a break from the conference we are attending this week to visit a friend's office yesterday. While we were there, we caught a glimpse of someone on TV saying that bond shorts were throwing in the towel, as the 10-year Treasury was on its way to adding another 5/8ths of a point to Friday's gains.
The price action in Treasuries yesterday confirms our thoughts that, despite having a golden opportunity Friday to hedge themselves, a number of mortgage investors missed the boat and did not hedge enough. We have written a number of times in the past how a move to these levels would spur increased mortgage refinancings. What we need to watch out for over the next few weeks is for a move that feeds on itself; if more mortgage investors need to hedge themselves by buying Treasuries, then the resulting price action would spur more refinancings and force the rest of the mortgage community to hedge themselves.
We can't say for sure if that will happen or to what extent; we've been involved in enough of them during our career to know that predicting the extent of moves like this is extremely difficult. What we can say to anyone involved in or looking at the Treasury market is that it is now in the hands of people who do not care about fundamental valuations, and for whom support and resistance mean nothing. All that matters to a mortgage investor now is to be hedged properly against potential swings in refinancings, so other investors in the Treasury space need to be careful.
Also, corporate bond continue to put in a much better than expected performance given how much Treasuries have rallied. Investment-grade spreads were unchanged yesterday, and junk spreads only widened 1-2 basis points. So, almost the full impact of the Treasury rally has flowed through to corporates, which is unusual.
That means that we remain in an environment where, since Friday, we are getting stimulus from both Treasury investors (through refis) and from corporate investors. We've noted that the only other time that has happened together in the last 5 years was last summer, which eventually resulted in significantly higher equity prices.
We've also noted that, in the short run, we expect the equity correction to continue, as the S&P has had trouble putting in a new high. The bearish investors that we have talked to really seem to be focused on the lack of job growth. Just as was the case last summer, those investors seem to be focused on the lack of current job creation, and are ignoring the stimulus from refis and corporates. We wrote yesterday that we don't know whether the correction will last for a few days or a few weeks but, the longer that the benefits from refis and corporates persists, the greater the odds are that we will eventually see new highs in stocks. |
