MBS AFTERNOON: Post Auction Rally Leads to Lower Rates
YAY REPRICES FOR THE BETTER!!!!
Since the results of bond auction were released "rate sheet influential" MBS prices have gone on a tear. The trend channel that began following yesterday's 10 yr note auction...is holding firm.
Unfortunately this "rate sheet influential" rally is not a function of firery demand for mortgage-backs.The guidance of our benchmark big brothers has however paved the way for longer MBS to rally. This is noticeable as MBS just cant seem to keep up with rallying TSYs. Although up in coupon trades are doing just fine...current coupon MBS are getting their butt whipped by TSYs....yield spreads are wider! (Current coupon = rate sheet influential)
Activity in the rate futures market is well above average. 930,000 contracts have been traded so far today...even better....some of that volume is NEW MONEY as open interest moved higher today. (Open interest = number of contracts traded...not same as volume). More contracts in rising price environment is good thing (for how long...who knows).
There was definitely some profit taking seen in the 10 yr today too as many traders had "steepener trades" open...specifically they bet that the 10 yr contract would outperform the 30 yr contract. This means they bet the yield curve would steepen...which you can see from the below chart did occur. After the auction traders covered their short positions, which lead to a short covering rally, then after that new money came into the long bond which added fuel to the fire. This implies the market is not so concerned about inflation...reminder: tomorrow we get CPI data! Looks like the market is betting that the yield curve will flatten out now...thats a good thing for rate sheet influential MBS!!!
Here is a longer term yield outlook....bouncing off 3.60%. Hmm...funny how trader's have restored pre-supply status quo isnt it? ITS A TRADER'S WORLD, WE'RE JUST LIVING IN IT!!! Hopefully you are starting to see how these short term yield curve trading strategies are effecting your rate sheets.
No, not seeing it? Well look what stocks did today. Close to the highs of the day. Close to 2009 highs. Stocks and bonds rally at the same time again? Yield curve ignoring the stock lever? ITS A TRADERS WORLD WE'RE JUST LIVING IN IT!!!!
TSY and MBS prices look like they will not close at the highs of the day...this isnt a major sign of weakness, however it does illustrate a bit of nervousness regarding tomorrow's CPI data and the undying optimism in stocks. Its only "SOME" nervousness though...if the market were really concerned about inflation data we wouldnt have seen new money entering the market following the auction.
NOW.....regardless of those secondary market implications.
HAVE LENDERS RETURNED BPS TO YOUR RATE SHEETS?
YES. I CAN SEE IT (however I do see some stingy reprices)
PERSPECTIVE: If lenders had offerred you this pricing last week...would you have gladly accepted?
IF YOU ANSWERED YES....TAKE YOUR PROFITS!!!
IF YOU ANSWERED NO...youve probably been floating since May. May God be with you...hope for fundamentals to find their way back to prices.
So tempting to float here...although we've detached from the stock lever for the time being we are due to reattach at any moment. ARE YOU WILLING TO BET YOUR INCOME ON THE BEHAVIOR OF STOCK TRADERS???
We think we see a selloff in stocks...anyday now...but that really doesnt give us much guidance for the future. How much of a retracement might we we see? How long would it last? Will TSYs detach from stocks and remain range bound over 3.50%?
My point.
UNCERTAINTY and VOLATILITY DOMINATE TRADING STRATEGIES. ITS A TRADERS WORLD, WE'RE JUST LIVING IN IT....DAY TRADERS PARADISE.
FLOATING REMAINS SUPER RISKY
....and it will remain risky until we get confirmation of a trend. It will remain risky until fundamentals start to matter again. Until then...choppy range bound price action. Volatility. Uncertainty.