Daily Market Commentary
Friday, March 12, 2010 at 9:00 a.m. CST

The third and final leg of the Treasury auction – $13 billion 30s reopening – met with strong demand. The auction came through by 1.8 basis points, compared with an average tail of two basis points for the past 12 auctions. Direct bidders took down 29.6% of the issue, a new record, absorbing a larger amount than indirect bidders (23.9%). With supply out of the way, the rate curve may continue to flatten over the coming days.

The Fed released its fourth-quarter Flow of Funds, the detailed listing of holders of U.S. Treasuries and Agencies/MBS securities. This is precisely where the Fed is the dominant market maker, by being the perpetual bid for 5% and lower yielding securities. And while there are no major surprises in the data set, it is notable that even as the Fed has purchased over $1.5 trillion in Agency/MBS debt, the total amount of all such securities over the past year has remained constant. The Fed has been buying everything that others have been selling. 

Yesterday, after tightening for the past six trading sessions, MBS weakened on the day with the current coupon Treasury/swap basis widening. With mortgages sitting at the tightest level of the year, buyers have scattered with continued fast money selling of the basis. As the Fed exits its MBS buyback program, we would expect spreads to continue to widen.

Friday morning's data releases will be the retail sales report, consumer sentiment and business inventories.
We expect retail sales to decline 0.2% in February, following a 0.5% gain in January. The inclement weather during the month is likely to have restrained sales. Auto sales are likely to show a marked decline   due not only to the severe winter weather, but also the massive Toyota recalls. Outside autos, we expect sales to slip 0.1%, pulled down by a decline in building material and gasoline sales. This should leave “core” retail sales unchanged, following a surge of 0.8% in January. 

The University of Michigan's preliminary index of consumer sentiment is expected to remain roughly unchanged at 74.0 in March. Consumers continue to be cautious, given the still-difficult labor market conditions. We expect households to report more positively in the coming quarters as they see a clear pick-up in hiring.

March 8 - 12, 2010: The Week Ahead
Sources: Bloomberg

**All quoted rates are indications and are subject to change without notice.

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