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Bond Market Commentary

Updates on bond market data, news, and activity each day.

February 26, 2021


In bond land, Treasuries are recovering some ground ahead of the opening bell on Friday, with yields easing from one-year highs. The yield on the 10-year note is down six basis points to 1.46%, still up more than 50 basis points year-to-date and on track for its largest monthly increase since November 2016. The yield on the 30-year bond is declining nine basis points to 2.20%, while the yield on the two-year note is off one basis point to 0.16%. Fresh economic reports will be in focus today, with updates on both personal income and spending scheduled to hit the tape at 8:30 a.m. ET. Other noteworthy releases today include the core PCE deflator (the Fed's preferred proxy for inflation), wholesale inventories, the advance goods trade balance, and an update on manufacturing PMI from the Chicago region. Rounding out the docket will be the University of Michigan's consumer sentiment gauge, with the final reading anticipated to show a modest improvement this month.

The Treasury rout deepened on Thursday, with the yield on the 10-year note briefly topping 1.60% before ending the day 15 basis points higher at 1.52% The yield on the five-year note also increased significantly, vaulting nearly 20 basis points to exceed 0.80%. The so-called "belly" (or middle) of the yield curve bore the brunt of the session's sell-off amid soft demand for a seven-year auction. The U.S. Treasury department issued $62 billion of seven-year notes at a high yield of 1.195%, well above the recent sale's 0.754% level. The bid-to-cover ratio (an indicator of demand) came in at a meager 2.04, reportedly the lowest on record, and compared to the previous 2.30 figure. Following the auction, the closely watched gap between two- and 10-year note yields widened as much as 141 basis points, the most since 2015. According to Reuters, some analysts have suggested the recent back-up in Treasury yields can partly reflect holders of mortgage-backed securities liquidating bonds to reduce the risks on the loans they manage (called "convexity hedging"). Others simply point to market participants preparing for price increases on goods and services. Better-than-expected economic data also pressured government securities, with the second print of U.S. fourth-quarter GDP showing the economy expanded at an annualized rate of 4.1% during the October-December period, improving from the initial 4% print. Separately, initial jobless claims came in at 730,000 in the latest week, below the projected 825,000 increase and easing from the previous 841,000 figure.

Mortgages

Mortgage rates advanced in the most recent week, rallying in tandem with a jump in U.S. Treasury yields, according to the Freddie Mac Primary Market Mortgage Survey® (PMMS®). Interest rates are increasing as investors anticipate a swift economic recovery from the pandemic-induced contraction. For the period ending February 25, 2021, the 30-year fixed rate surged 16 basis points to 2.97% and compares to 3.45% at this time last year. The 15-year fixed mortgage rate advanced 13 basis points to 2.34%, versus 2.95% a year ago. Five-year Treasury-indexed hybrid adjustable-rate mortgages averaged 2.99%, higher by 22 basis points from the prior week and compares to 3.20% at this time last year. While mortgage rates are elevated at the highest levels in months, they remain near historic lows.

Municipal Market Commentary

Tax-exempt new issue supply is expected to total $6.4 billion during the week of February 22nd, compared to last week's total of $3.8 billion and the 2020 weekly average of approximately $6.1 billion. The Bloomberg 30-day visible supply fell $2.239 billion to $10.824 billion on Thursday, below the 12-month average of $13.267 billion.

This information is obtained from sources and data considered to be reliable, but its accuracy and completeness is not guaranteed by Wells Fargo Advisors.

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