MBS MORNING: Rates Market Ignoring Bearish Fundamentals
Despite better than expected jobless claims data, proof that business inventories are still contracting, improving retail sales, a weaker dollar, another TSY auction, and rallying stocks...status quo is being maintained in the bond market. Yesterday's bond buying put a level of support under the market!
The FN 4.0 is trading +0-06 at 99-29 yielding 4.0166%. The FN 4.5 is +0-04 at 102-01 yielding 4.2407%. The secondary market current coupon is 4.028%.
Here is the FN 4.5. 102-00 is acting as resistance. See why below...
In mortgage specific trade flows, the pending Class A settlement process and rich valuations ( high prices, tight yields spreads) appear to be keeping many market participants from adding new MBS positions.
Real money buyers like banks and insurance companies should be focused on FN 4.0s as the yield curve flattens and cash flows extend. Although supply from mortgage bankers has been slow this morning, the Fed remains an ever-present source of liquidity for originators looking to sell their supply of loans (aka hedge their pipeline).
Breaking into the 102 price handle should elicit a round of originator rate locking. CAUTION: this could create a bit of price CHOPATILITY. While we anticipate a few price dips, we expect to see the Fed and the previously discussed real money accounts taking advantage of marginally cheaper prices when supply hits bid lists...so unless benchmark yields rise noticeably...any moves lower in MBS prices should soon be followed up with a bounce towards 102-00.
In related markets action, ahead of the Treasury Department's 1pm auction of $12 billion 30 yr bonds, the 10yr TSY is holding steady at 3.17%, near yesterday's close.
That is important observation! 3.17% is the lowest yield the 10yr has CLOSED at in almost 5 months (MG pointed this out last night)...
The market's willingness to accept these low yields, even in the face of the headlines listed above, makes us wonder if last's week's test of 3.10% was really indicative of a shift in BIG PICTURE economic outlooks/trade biases. Was the recent rise in benchmark yields purely a function of this week's debt supply?
Considering the economic calendar has been extremely light this week....we are fairly confident that rising yields and a briefly steeper yield curve were a function of supply/Treasury auctions. Our outlook has been firm throughout the evolutions in the economic environment: until the housing/mortgage market is appropriately addressed and the labor market stops contracting (weak consumer), we will remain bearish on the BIG PICTURE. There have been no widely accepted solutions offerred up to solve the secondary market sustainability issue (not yet at least...muhuhahaha)...Why should we feel positive about the future of housing right now?
That said, it should be clear that we are not finding it difficult to accept lower yield levels..and less returns. (PLUS: Relative to inflationary expectations...real US yields are actually paying more than their global competition...one reason why TSY auction demand remains strong).
To wrap up that thought...we need the 10yr TSY note to CLOSE below 3.17%. In order for that to occur we will need a breakdown in equity markets OR econ data that implies weak consumer spending and further contraction to come.
Yesterday the Wall Street Journal announced that the GSEs were reaching out to help mortgage bankers, however there wasnt much meat to the story. We explore the issue on the VOICE OF HOUSING blog. Dont miss commentary on this blog channel...
NEXT EVENT: 1PM 30 YR BOND AUCTION