By Isobel Kennedy

NEW YORK, Nov 14 (MNI) – The Treasury market held in a very tight range
Wednesday but the agency mortgage backed securities market continued to get hit
as year end balance sheet issues began to come into the play.

The 10-year Treasury note hit a high yield of 1.63% in overseas trading
Wednesday but the yield steadily fell in New York trading hours to 1.57%.

No one was quite sure why and no one was even delving too deeply into

It is possible Treasuries got a lift from the trashing taking place in the
agency MBS market.

In general, lower coupon MBS were hit down by the fact that sellers
overwhelmed the market in the past few days but traders were already long and
did not want to warehouse any more risk heading into year end.

For a complete run down of all the problems plaguing MBS, please see
Mortgage Memo that ran on the Main Wire at 14:25 E.T. today.

October retail sales fell 0.3% and ex-motor vehicles were flat. Both were
below expectations and followed a mixed revisions in the previous two months.

Commerce said it cannot quantify the impact of Hurricane Sandy, but said it
was able to collect data from the affected areas with some delay.

The October producer price index fell 0.2%, and the core also fell 0.2%,
both below expectations. Overall, PPI is now up 2.3% year over year vs. a rise
of 2.1% in September. Core PPI is now up 2.1% year over year vs. 2.3% in

Andrew Grantham of CIBC World Markets says Hurricane Sandy “will take the
blame” for the 0.3% decline in October headline retail sales. However, the
overall softness in the composition is troubling heading into “the critical
year-end sales period,” he says.

Grantham reminds that auto sales typically suffer “the largest hit at times
of major weather events” and so “the misses relative to consensus forecasts for
ex-auto and core retail sales (excluding autos, gas and building materials)
could point to softening underlying trends as well.”

JP Morgan’s economist Michael Feroli noted “retail sales were
disappointingly weak in October, as total retail sales fell 0.3%, and core
(ex-auto, gas, and building material sales) slipped 0.1%. The big question in
this report was whether and to what degree the weakness was driven by Hurricane
Sandy. Automakers blamed the storm for some of the last month’s weakness, when
retail auto sales fell 1.5%. Outside of autos, while some storm effect may be
present it is impossible to say anything definitive, and so we will need to be
especially sensitive to early November indicators to see whether catch-up
spending is taking place, or whether fiscal concerns and weak income growth are
weighing on consumer spending.”

Looking ahead to Thanksgiving, bonds and stocks will be closed for the
holiday on Thursday, Nov 22 and both markets will observe an early close on
Friday, Nov 23. There is no early close recommendation for the Wednesday ahead
of the holiday

NOTE: Talk From the Trenches is a daily compendium of chatter from Treasury
trading rooms, as well as some sister market trading rooms, and is offered as a
gauge of the mood in the financial markets. It is not necessarily hard, verified

** MNI New York Newsroom: 212-669-6430 **


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