MBS OPEN: Choppy Summertime Price Action

By: • Thu, Aug 20 2009, 8:31 AM

This AM So Far

Overseas stocks higher. Shanghai Composite bounces +4.5%, reversing previous session's losses. Nikkei, FTSE, Dax all higher.
UK reveals 8bn pound deficit vs. 5.2bn surplus last July. Deficit led by fall in corporate tax receipts.
BUT....Retail Sales in UK better than expected at +0.4% (expected +0.2%) after rising 1.3% in June. Year over year rate rises to 3.3% (expecting +2.6%). Previous read was +3.1% annual growth rate.
US Stock Futures playing follow the leader with overseas equities. S&P Futures 5 points higher...just barely over 1,000 again.
US TSY futures suffer from stock lever overnight. 10 yr contract back to 117-25 "status quo" level after closing over 118-00 yesterday. 117-25/26 is key pivot point (resistance/support level)....
Although US futures markets reacted to overseas data...US traders waiting on domestic data to develop own opinion

Recap of Yesterday

Matt wrote fantastic MBS CLOSE
No real data to move money. TSY price action based on techs and stock lever.
TSY yields moved lower in the morning, higher in afternoon.
TSY traders took profits as the S&P broke 990 and moved towards 1,000 again. RANGE TRADING OBVIOUS
Choppy/Wide "rate sheet influential" MBS price range. Just like TSYs, MBS prices higher in morning, lose gains heading into afternoon.
Reprices for Worse Reported. Par Mortgage Rates still in 4.875 to 5.125 range
FN 4.5 continues to feel PARNERTIA pulling prices towards 100-00. This is Negative Convexity at Workl
Current Coupon Yield Spreads Still Getting Wider as TSY feel the love of FTQ bids.
Supply > Demand also not helping MBS relative value. Fed still buying...as always

In the Time It Takes to Type

Jobless Claims Released. Higher than expected
Claims rise to 576k this week after 561k last Thursday. Higher than expectations for 550k new claims
Continued claims rose to 6.241 from 6.239. Higher than anticipated 6.20
4 week moving average rose to 570k from 565,750
TSY futures likey. 10 yr contract price move over 118-00. Right back to yesterday's closing marks.
Cash market 10 yr TSY yield at 3.45. Yesterday's closing level. Status quo? Amazing! (note sarcasm)
Stock futures no likey jobs data. After going sideways just over 1,000 most of the night. S&P futures now back below 1000 at 997.
Rate Sheet Influential FN 4.5 prices are once again...CHOPPY!!!! But over 100-00 (for now). Watching for profit takers and supply...be wary of the choppiness.

The Day Ahead

Its summer. Range Trading in low liquidity = trader's chop chop chopping their way to profits. More up down up down price action expected
FN 4.5 MBS prices in the 100-00 handle and 5.0s trading over 102-00 = opportunity for lenders to sell some loans. However the notion that rates could go lower may keep rate sheets tempered for the time being...FALL OUT can get expensive. Looks like lenders are in "wait and see" mode too....NEED CONFIRMATION PLEASE. (might have to wait until September for that)
TSY announces next weeks borrowing needs. Expecting $43 billion 2 yr notes, $40 billion 5 year notes, and $29 billion 7 year notes. Market will formulate yield curve strategy for week ahead (flatter vs. steeper) after announcement.
More data to come....all markets defensive