MBS MORNING: Rates Market Benefits from Stock Selling
The FN 4.5 MBS coupon has formed an aesthetically pleasing trend channel this morning, progressively achieving higher highs and setting lower lows.
Currently the FN 4.5 is trading +0-08 at 100-29 yielding 4.351% with a floor set in at the FN 4.5's most recent 100-16 pivot point. Check out how we've kinda bounced around that price point since Monday afternoon. (ILLUSTRATES RANGE BOUNDNESS!)
MBS trading flows are slow ahead of the 7yr note auction, much of the price appreciations we have enjoyed today are a function of rallying benchmarks. Looking ahead, profit taking and originator locking is likely to occur as prices tick higher. The 101-00 bid level will serve as a psychological resistance point for further progress.
Rate sheet rebates are improved today.
In the TSY market, the long end of the yield curve is outperforming the short end...the curve is flatter.
530,000 TY contracts have been traded so far today (TY= 10yr contract). This does not reflect an especially active rates market, however volume in electronic futures trading has been steady all morning. The 10yr contract's trend channel looks very similar to the FN 4.5s (SEE COMMENTS ABOVE re: MBS price appreciations).
In the cash market, the 10yr TSY yield tested the 38% retracement of the Sept. 9 yield lows...and failed. The good news: there wasnt a knee jerk SELL reaction when the first attempt to break resistance failed.
Much of the strength TSYs and MBS are experiencing this morning is as a result of a weaker equity market. After setting another 2009 high yesterday, the S&P lost intraday momentum and ended up breaking through the low price point of the previous trading session, closing at the lows of the day. Then this morning stocks opened stronger following better than expected jobless claims data, however after a worse than expected read on Existing Home Sales...stock sold off. Currently the S&P is testing 1050...which happens to be the 38% retracement of the most ecent bullish trend cycle, which began on Sept. 3.
This is a significant retracement. STAY TUNED for further stock market drama. And no..we are not going to pose the question "Is this the end of the relentless stock market rally?" (eventhough we just did :-D)
Yield Curve
2s/5s: 2bps steeper at 144bps
2s/10s: 2bps flatter at 244bps
5s/10s: 4bps flatter at 101bps
5s/30s: 4bps flatter at 179bps
10s/30s: unchanged at 78bps
The dollar index is +0.89%. The EUR/USD is 1.4698. It was 1.4786 when we last updated you the markets.
Oil prices are $2.60 cheaper. Gold is trading at $997...it was at $1,014 when we last updated.
Treasury will auction $29 billion 7 yr notes at 1pm.Weakness in stocks has helped prices rally from 99-21 to 100-04. As of 12:20 when I appended this post, the 7yr was trading at 100-00 yielding 2.99%, 9bps richer than when the TSY announced the terms of this week's auction last Thursday.
The When Issued 7yr note is trading at a yield of 3.04%.
Here is a look at the past seven 7yr note auctions.