MBS OPEN: Rates Rising Ahead of Auction Announcement

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Recap of Yesterday

  • TSY moved randomly about the range....10yr fell 9/32 in price, yielding 3.37%. 2yr drops 2/32 in price, yielding 0.95%.
  • TSYs still operating within the range. Short term/day trading strategies dominate, no BIG PICTURE implications over intraday ups and down's. MG further explains...
  • Stocks were stronger most of the day before the floor fell late in the session. S&P closes -0.89% at 1,081. NASDAQ falls 0.59% to 2,150, Dow declines 0.92% to 9,948.
  • The dollar makes new 14 month low. Weakens to $1.50 against Euro. Dollar index heads out -0.52 at 75.17
  • FN 4.0 closes at 98-05. FN 4.5 at 100-27. FN 5.0 done for day at 103-08. Secondary market current coupon was 4.337%. CC
  • Rate sheet influential MBS yield spreads were wider in the morning, but tightened in afternoon as lower and wider valuations attracted buyers. CC +94.6/10yr TSY, CC +76.8/10yr swap
  • Reprices for the better reported in afternoon
  • Beige Book says Stabilization Occurring at Depressed Levels. Commercial Real Estate is weakest sector of economy.
  • Findings of Beige Book re-affirm the Fed's need to keep rates near record low levels
  • Bove downgrades Wells Fargo from "hold" to "sell"
  • Do you know about FAS 166 and FAS 167? You should...these accounting rule will force certain loans back onto bank balance sheets which will force them to add funds to reserves to keep ratios about required levels. More reserves = less money to lend to consumers and small businesses. READ MORE

So Far this Morning

  • Stocks lower around the world: SHANGHAI -0.62%, HANG SENG -0.48%, TOPIX -0.56%, NIKKEI -0.64%, CAC -1.47%, DAX -1.36%, FTSE -1.08%
  • Jobless Claims rose to 531,000 from 520,000. Higher than consensus expectation of 515,000.
  • Continuing Claims fell to 5.923 million from 6.021 million (revised higher from 5.992 million)
  • US stock futures cheapened up overnight, but bounced higher where the most recent bull cycle began near 1075

Stocks moved higher after jobless claims data..again going the opposite direction one would expect after worse than anticipated econ data. THE RANGE TRADE PERSISTS....looking for stocks to fail recovery test

Rates are rising ahead of the 11am TSY supply announcement. Benchmark TSY traders not so much focused on BIG PICTURE or data....traders more concerned with their set up strategy for next week's auction cycle.

The FN 4.0 is currently -0-03 at 98-02 yielding 4.199% and the FN 4.5 is trading -0-07 at 100-20 yielding 4.426%. The secondary market current coupon is 4.358%.

The CC is+92.2bps/10yr TSY. The CC is +74bps/10yr swap. The FN 4.5 is +99bps/10yr TSY and +80.8bps/10yr swap.

Below is the FN 4.5 two day chart. Prices have fallen into the low side of the range.

The Day Ahead

  • READ MNDs Econ Calendar

The range remains intact... you know what we keep saying: Play the Range Until the Range Plays You... Float at the Price Lows, Lock at the Price Highs. This strategy has been consistently profitable for originators looking to pick up a few extra bps in pricing. At the moment, the BIG PICTURE remains too unclear to base trade strategies off of your perception of economic reality, thus the short term trading bias continues to dominate flows. Today, at 11AM, the Treasury will announce the terms of next weeks cycle of 2/5/7 year TSY note auctions. With not much else to trade on...this supply announcement is pushing rates higher and the yield curve steeper this morning. 

As pointed out above the FN 4.5 yield is currently 99 basis points higher than the 10yr TSY yield. If the 10yr test 3.45% and yield spreads hold at 99 basis points, the FN 4.5 will touch 100-16. We would expect to see 3.45% serve as a firm level of support for falling rates though, and therefore 100-16 will support falling rate sheet influential MBS prices. If a bounce does occur, rate sheet influential yield spreads should tighten a bit.  . If 3.45 is broken we will alert....

If your lender repriced for the better yesterday, you will likely lose those afternoon gains. Rate sheet rebate should be about 25bps worse this morning....

MBS, TSY, LIBOR QUOTES

PS...Up in Coupon should see more attention after several days of cheapening