MBS MORNING: Prices Bouncing Around Pivot Points
The best description of MBS price action so far...THE CONTRA CHEAT CODE: Up, Up, Down, Down, Left, Right, Left, Right, B, A, B, A.
When inspecting the below chart many would scoff at me if I said its been a quiet morning in MBS markets. Well Scoff it up...its been a quiet summer morning for "rate sheet influential" MBS! Originator supply has been under $1 billion and "rate sheet influential" trading flows have been minimal. The below price activity is really a function of negative convexity in current coupon MBS prices. Prices simply dont have any room to run higher unless a bullish bond bias is confirmed in benchmark markets. And guess what...a fixed income rally wont be confirmed until the 990 S&P floor is convincingly broken. Still tapping my foot, looking at my watch. Is it September yet?
PARNERTIA!!! When FN 4.5 prices fall below 100-00, yields increase a few bps. When prices tick over 100-00, yields fall a few bps. PARNETIA is keeping prices in check right around 100-00.
After the jobless claims print many wouldve expected stocks to selloff. Well S&P futures did move lower at 830...but that didnt last long.SURPRISE!!!! (haha). The S&P is currently +7.72@ 1004. Yep...back over 1000 again! Darn floor in the market....
Notice the stock lever isnt killing the rates rally (yet)? Thats because today's equity rally is likely a function of short covering in a market with no liquidity.That means prices are moving more than normal because everyone is on vacation!
Meanwhile...the 10 yr contract is minding its business, holding a range. Remember when we discussed the 117-26 price level yesterday. Check out how traders keep making their way back towards that all important pivot point. This illustrates the concept of maintaining status quo/ waiting for guidance while stock traders try and squeeze every last tick out of the 50 frickin day rally. 5s continue to be the weakest spot on the curve while 30s are outperforming...the yield curve is flattening! (but really isnt having an effect on rate sheet influential MBS).
Treasury just announced the terms of next week's mini-Refunding. All three offerings are unchanged from July. The package totals $109 bln and consists of $42 bln 2s, $39 bln 5s, and $28 bln 7s. 2s will go off on Tuesday, 5s on Wednesday, and 7s on Thursday. The issues will settle on Monday August 31 and will raise $90 bln in new cash for Treasury. Following the release...both MBS and TSYs bounced for the better.
Its definitely been a choppy morning in MBS world. 100-08 one minute, 100-00 the next. PARNERTIA just keeps pulling on FN 4.5 prices. Fortunately, jerky secondary market gyrations are not having much of an effect on rate sheets though. I see some lenders better and some slightly worse. Overall...rate sheets are range bound while the market day trades away the waning summer session.
Choppity chop chop the day away. A sustained break below 100-00 in FN 4.5s or 102-00 for FN 5.0s would warrant a reprice alert.