MBS MORNING: Searching for Right Range
The dominant theme this morning is that SUMMER IS OVER, TIME FOR MARKETS TO GET BACK TO WORK. Although that is indeed the case, it doesnt necessarily mean that clear direction can be taken from this week's price action....
A slow economic calendar ahead combined with a general "back to work" hangover is likely to keep the markets focused on supply/demand technicals. This implies that it is acceptable to expect price action to remain choppy while market participants get acclimated with new ranges. Chopitility persists!
For the bond market...the lack of an economic agenda leaves the market in search of reactionable incidents and events. As advised in Friday afternoon blog commentary, we believe this environment will bring about a backup in rates as trader's price in this week's round of Treasury supply ($70bn 3s/10s/30s).
There is a flip side to this outlook though...the empty econ calendar leaves equity traders in search of reactionable incidents and events too. Throughout August the story in stocks has been slow trading and several signs of weakness...yet the floor consistently held. More recently sentiment has soured and signs of an impending sell off have resurfaced. While we are no longer attempting to forecast the timing of such a stock selloff...we remain cognizant of the fact that the stock lever can have strong effects on the shape of the yield curve and thus mortgage rates.
That said...this week mortgage rates are at the mercy of a light econ calendar, TSY supply, and the effects of the stock lever.
The rates market has reflected the effects of a "back to work" hangover this morning. MBS trading volumes are light and flows are generally slow. Price action has been choppy with much guidance taken from the gyrations of the yield curve. Currently the FN 4.5 is +0-03 at 100-19.
If TSY yields start to rise and FN 4.5 prices fall below 100-13...we will sound an ALERT. Remember 100-13 served as strong resistance all summer, now its support.
In stocks...the S&P has run into a familiar foe at 1026. It looks like a range trade is developing between 1016 and 1026....a break though resistance would be fixed income BAD. A break through 1016 would be fixed income GOOD.
An update on the Fed's exit from liquidity programs...
The Fed conducted round 52 of open market purchases...today's coupon pass was for TSYs maturing between 5/2016 and 8/2019. This morning the Fed bought $4.95 billion in TSYs....the market was expecting between 5.5 and 6.0bn. So we are starting to see the effects of the Fed's exit process from open market operations.
At 1pm the TSY will auction $38 billion 3 yr notes. Here is a look back at recent auctions...
Mortgage rates are mostly unchanged from Friday. Remember CHOPITILITY persists...if you did not lock in last week and are floating in the short run...STAY ON HIGH ALERT.