Results of the 5 year note auction (42 billion) just hit the tape at a yield of 2.395%. 40.3% were taken by Indirect bidders (good), 12.8% by Direct bidders (ok), 2.75 to 1 bid to cover ratio (average), yet the issue created a 1.5 bps tail (not so good). Reasons for the auction to be on the sloppy side are 1) charts at stiff resistance and overbought 2) strong stocks (Dow plus 106) 3) Bernanke’s testimony touting “low mortgage rates for an extended period, no assets sales, and continued evaluation of security purchases”.
The latter is stock friendly and worrisome to bonds (inflation). Earlier today, New Home Sales fell to a record low 309K units, off 11.2% in January. Sales in the Northeast took the most beating, down over 35%. Weather was certainly a factor so we are looking for a bit of recovery coming in Feb/March. Technically, the rally we’ve seen the past couple of days has improved the charts, turning the trend to neutral from bearish. The key here is neutral not bullish, telling us that continued upside (better mortgage pricing) will be a challenge.
Currently, the 10 year note is off 1/32nd to yield 3.70%, mortgage backs unchanged, and stocks up over 100 on the big board. Caution is advised.