Treasuries Pushing at Yield Highs Once Again
To this point, Treasuries have managed to navigate a week that could have put them up against the rocks of higher yields on several occasions, but instead they’ve mostly avoided any major disasters. First, it was a trio of reopening auctions, especially the $38 billion in additional 10-year notes auctioned on Wednesday and $24 billion in 30-year bonds yesterday. After the frightful results of the 7-year auction last month all eyes were on the Treasury results this week for even longer duration debt, but it was absorbed without difficulty. The auctions weren’t great but buyers were found without the need for major yield concessions. Then, the Stimulus 3.0 package was signed into law yesterday with its $1.9 trillion price tag intact and Treasury investors shrugged yesterday but are rethinking it this morning testing last week’s high yield. We’ll see if it survives through the day.
With the American Recovery Package and it’s $1.9 trillion price tag signed into law, and the supply of fresh 10-year and 30-year debt sold this week, one may have thought Treasury yields would be on the back foot with recent high yields tested. Well it took a day but we are there. Treasuries had been rather quiet this week trending lower in yield but this morning the upper band of the recent 12 day range of 1.37% to 1.62% is being tested as shown in the graph below.
Once yields moved through 1.50%, 10’s probed into the 1.60’s in short order but had been moving sideways and lower this week, and that is surprising given Stimulus 3.0 becoming law and with additional 10-year and 30-year Treasury supply. Call that a delayed reaction because this morning we are back testing the recent yield highs. So far, the high yield of 1.6238% from a week ago has held but whether it finishes today intact is still a story yet to be told. Will it be the case now with stimulus 3.0 done, and vaccine deployment improving by the day, investors turn to economic results to see if the expected 5% to 6% GDP growth will become reality and be the driving force for yields for the balance of the year? If that is the case, and the economy delivers, as forecast, expect that high yield above to fall and yields to turn higher once again.
Refi’s Come Off the Boil With Recent Back-Up in Mortgage Rates
The one risk mortgage investors have been dealing with in the past year is trying to manage prepayments in premium-priced MBS bonds. Even low-coupon, new issues have been prone to refinance in the past year as non-bank servicers target borrowers with larger loan sizes and with efficient underwriting and closing processes it has made the refinance process cost effective even for slight decreases in mortgage rates. Lately, however, the ramp in Treasury yields in February and early March has also led to increases in mortgage rates and it seems that modest move higher has already started to be reflected in a lessening in refinance applications. The graph below compares the FHLMC 30-Year mortgage rate to the MBA Refi Index. As show, the dip to an all-time low rate of 2.65% early in the year (blue line) brought with it a spike in refi applications. Since then mortgage rates have risen 40bps to 3.05%, the highest since mid-2020, and notice the fall off in refi applications. While the rate is still high historically speaking it does look like softening in prepayment pressure may be in the offing in the coming months if the recent back-up in rates holds, or extends further.
US Steel Index Points to Higher Yields
We’ve been known to show the Copper/Gold Ratio versus 10yr Treasury yields and the close relationship the two have over the years. That ratio with copper prices rebounding over the last half year implied that higher yields were in store for Treasuries and that has indeed been the case. Another indicator in that same vein is pointing to a similar conclusion. This time it is the Dow Jones US Steel Index and the 10-year Treasury. As the graph shows steel prices have been on an upward trajectory since the second quarter of 2020. The rebound in steel prices reflects the rebound in the manufacturing sector coming out of the spring lockdowns, and if history is any guide it points to even higher yields ahead for the Treasury market.
|Treasury Curve||Today||Chg Last Wk.||LIBOR Rates||Today||Chg Last Wk.||FF/Prime||Rate||Swap Rates||Rate|
|3 Month||0.03%||Unch||1 Mo LIBOR||0.11%||Unch||FF Target Rate||0.00%-0.25%||3 Year||0.438%|
|6 Month||0.04%||-0.01%||3 Mo LIBOR||0.18%||-0.01%||Prime Rate||3.25%||5 Year||0.914%|
|2 Year||0.15%||+0.01%||6 Mo LIBOR||0.19%||-0.01%||IOER||0.10%||10 Year||1.605%|
|10 Year||1.59%||+0.02%||12 Mo LIBOR||0.28%||-0.02%||SOFR||0.02%|
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