MBS LUNCH: Stock Lever Influence Obvious
The stock lever's influence over the bond market has been quite obvious today. The below chart illustrates the relationship between stocks and bonds. The price of the SEPT 10 yr futures contract (YELLOW) falls when the price of the S&P futures contract rises. Pretty obvious relationship....STOCK LEVER STOCK LEVER STOCK LEVER
At the moment the S&P has fought off mounting selling pressure....stubbornly bouncing off 980 support as rally chasers attempt to keep a floor under the market.
Meanwhile in the rates market, yield curve traders have retraced all of yesterday's gains. Right meow 117-26 support, which was once firm resistance, is serving as a support level, however dont be surprised to see this pivot point lead to further selling in the event stock traders can hold S&P gains over 990. Day traders like to take profits...especially when they are DAY TRADING!!! (haha) Below 117-26, the next major support lies at 117-12, the 62% retrace of July price highs.
I know many of you may be scratching your head wondering WHY ARE STOCKS SO STUBBORN? WHAT NEWS COULD POSSIBLY GIVE REASON TO RALLY? WHY ARE BONDS SELLING?
Unfortunately we are left without a rational fundamental explanation of the day's price activity. Instead we continue to focus on the short term technical strategies governing trade flows. There is still a floor under stocks as many market participants look to squeeze every last drop out of the recent run up in equities and the bond market is waiting around for further guidance...in position to keep the rally alive in the event the floor falls out from under equities.
Plain and Simple: whats bad for stocks is good for bonds. Whats good for stocks in bad for bonds. Take advantage of the choppy action as you see it!
Going a little deeper into bond market analysis. The Commitment of Traders report tells us that speculators are mostly short the 10 yr note and 30 yr bond while dealers havent been this short TSYs since last year. I know you might think: "with much of the market short TSYs...we're doomed". But its actually the opposite...we would expect a correction of this overbought position.....meaning market participants are more likely to buy just to get in a more neutral position.
HAHA...too technical?
I'm sorry but it is what it is..would you rather us feed you some bs on whats moving money around the markets?
Ok fine...it waaaas the EIA's report indicating that stockpiles of Crude Oil fell 8.4 million barrels last week, the biggest drop since May. Come on...weak consumer? The market didnt forget that already...squeeze those last drops stock traders. Us fixed income guys are tapping our foot looking at our watches.
Dont worry I will relate this to mortgages now...
Just like TSYs, the FN 4.5 isnt reacting well to the stock lever. After reaching and intraday high of 100-11, we have fallen below 100-00. Parnertia! Reminder: "Rate sheet influential" MBS prices go down faster than they go up! Thank you Negative Convexity! (note sarcasm). But...as MG pointed out yesterday, mortgage-backs can show some independence in the face of weakening benchmark big brothers. Just as PARNERTIA pulls us lower, it can also provide support to cheapening prices. Little does parnertia know, it also keeps our hopes and dreams within reach...keep pulling prices back from under 100-00 PARNERTIA!!! (please)
Time for a rate sheet reality check.
We've enjoyed quite a rally in TSYs lately. The demand for risk averse assets has also served to push "rate sheet influential" MBS prices back to 100-00 (partnertia). YAY right? Yeh we think so...but we keep hearing "lenders arent giving us enough, lenders are being greedy".
I know this causes some muttering among the herd of floating loans...but mortgage rates have dipped below 5.00% again. Quit complaining and lock up some fence sitters.
Yes...we are tapping our foot waiting for the floor to fall from under equities, yes there are several bullish indications that fixed income is due for a rally. BUT FLOATING STILL REMAINS SUPER RISKY. We have been through this all summer...yet stocks just kept on rallying.We're closer than ever but still have no confirmation...
FURTHERMORE!
Markets are operating in a day trading marketplace. Dont forget what a volatile interest rate environment does to a mortgage banker's pipeline. First rates go lower, then rates go higher, then they go lower, then higher again. Meanwhile lenders are attempting to generate mortgage rates based on the values they can sell the loans for in the secondary market. Well...those values are all over the place (servicing is part of income too)...making a pipeline hedgers job a liiiiiittle more difficult. In choppy interest rate environments there are many risks that could turn out to be expensive costs for a lender. Interest rate risk and fall out risk being two big ones. Just remember that hedging a massive pipeline in a volatile environment is tough...and passing along too much or too little to a rate sheet can turn out to be an expensive mistake.Dont forget where the floor has been for mortgage rates all summer...4.875.
As far as the rest of the day goes....we expect to see more and more out of office replies. The JV trading desks aren't going far in either direction. Their goal is to provide liquidity and not get in anyones way. Any drift in prices is simply that...a drift. Dont try and create any long term outlooks from the day trading behavior of the marketplace.
Its reality for now. Live in it.
WE HOPE THE 945 REPRICE FOR WORSE ALERT WAS WELL READ...because lenders repriced for the worse. Your pricing has been adjusted back to yesterday's levels.
PS No I am not angry today...