MBS OPEN: Rates Correcting Within the Range

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Recap of Yesterday

  • Single Family Housing Starts Increase. Building Permits Decline.....a sign new construction will fall in the future
  • Producer Price Index -0.6% in September vs +1.7 in August. Year over year PPI -4.8%. Core PPI -0.1% vs. +0.2% in August
  • Stocks retrace a portion of recent gains. Only third down day in last twelve sessions. S&P -0.62% to 1,091, Dow down 0.50% to 10,041, NASDAQ 0.59% lower to 2,163
  • Dollar index trying to recover from 14 month low vs. basket of currencies.  Dollar index ends NY session +0.05% to 75.50.  Choppy session after China, France, and Canada express concerns over weak US dollar
  • Oil prices fall below $80/barrel after hitting new one year high at $80.05. S$P energy index falls 0.85%
  • In decent volume, US Treasuries extended their rally off of recent yield highs/price lows. Positive sign to see trading volume holding steady even as rates fall
  • Weaker than expected 8:30am Housing Starts and PPI data helped the rally gain traction. Range trade still in play...MG Discusses
  • Tuesday's Closing Levels: 2s: 100-04+ yielding 0.923%, 5s: 100-13 at 2.287%, 10s: 102-11+ at 3.343%
  • The yield curve flattened marginally. 2s/10s at 241bps
  • Fedspeak Update: Late in the day, Yellen reaffirms low rate policy, says we must be careful about declaring crisis over
  • Mortgage-backs traded in a tight range. MBS lagged benchmarks most of the day, rate sheet influential MBS coupons perform better than fuller coupons as UIC still considered rich, but coupon stack is balancing back out. 5.0s star performer. 6.5s performed better than 6.0s.
  • FN 4.0 ends day at 98-11+, FN 4.5 goes out at 100-28+, FN 5.0 at 103-09+, FN 5.5 at 104-24+, FN 6.0 at 105-26+
  • Mortgage Rates were marginally improved. A few reprices for the better reported.
  • I watched the "State of the Nation's Housing Market" Senate Finance Committee hearing last night on CSPAN.
  • An extension of the FTHB Tax Credit was called for by Sen. Dodd and Isakson

So Far this Morning

  • SHANGHAI -0.45%, HANG SENG -0.30%, TOPIX +0.03%, NIKKEI -0.03%, CAC -1.28%, DAX -0.92%, FTSE -1.00%
  • US stock lower this morning, but improving off the lows. The range trade persists in stocks too!

Here is an S&P futures chart showing the step ups and step downs taken in October. 1075 is obviously strong support at this point. This morning, 1082 stopped selling...

Treasury yields are higher to start the day. This is a function of the range trade and a correction of yesterday's rally, not headlines. We went far enough in one direction, now we head back in the other. Looming TSY supply announcement is next trade set up to be considering. In the mean time, the  release of the Beige Book will provide the market with a look into the health of the macroeconomy. We would expect continued economic uncertainty around the country...which supports the Fed's rhetoric that rates will remain low for an "extended period". That's good for mortgage rates!

THE RANGE IS STILL IN PLAY....

Below is a chart of 10yr TSY futures. The 118-03 to 118-09 area has been a strong pivot point/area lately. Remember a pivot point is a price/yield level where the market generally considers changing direction. A pivot point exerts the gravitational forces on prices...which MG discussed last night.

The 118-03 to 118-09 range corresponds to 3.38 to 3.41 range in yields which happens to a high traffic area for several technical price levels including the 40 day moving average (3.374%) and the 38% retracement (3.41%) of August yield highs. This range is a strong pivot point!

Unfortunately, weakness in rate sheet influential benchmarks is pushing rate sheet influential MBS prices lower this morning. The FN 4.0 is currently -0-07 at 98-05 yielding 4.190% while the FN 4.5 is trading -0-05 at 100-24 yielding 4.410%. The secondary market current coupon is 4.33%.

Currently the FN 4.5 yield is 102.7 bps over the 10yr TSY yield. (4.410 vs. 3.383). If this spread stays constant and the 10yr tests 3.41, the FN 4.5 will fall to a price of 100-18. If this yield spreads stays the same and the 10yr yield falls to 3.32%, the FN 4.5 will trade closer to 101-08. A reprice for the better would be more likely to occur if the 10yr crosses 3.35% and the FN 4.5 breaks 101-00.

This is an opportunity for us to point out a recurring theme in market....often times the market goes against the logical reaction one expects to see from fundamentals such as econ data and earnings. This is a function of a short term, day/range trading environment being controlled by professional traders, dealers, and bankers. Remember: sometimes the data leads the trade, sometimes the trade leads the data. Dont try to identify the underlying fundamental rational of trader reactions. Identify the range and play it until it plays you! When all is said and done, take a look at the BIG PICTURE implications moderating recent trends in asset prices. Dont look at day to day movements for BIG PICTURE direction.

Rate sheet rebate will be slightly worse this morning....count on a 25bp haircut

MBS, TSY, LIBOR QUOTES