MBS MORNING: Near Lows of Day After Data-Inspired Chopatility

By: Matthew Graham •

This AM saw a bit more scheduled economic indicator data than usual, including a "top-shelfer" in the form of ISM MFG Index which exceeded expectations. READ MORE on econ data

After a better than expected read on manufacturing conditions, the 10yr TSY note traded up to 3.45% before bargain buyers stepped in to stop the bleeding. Since then a slow and steady progression of buying  led the benchmark 10yr note back towards the aggressive side of the recent range. Bids however began to taper off when President Obama interrupted your regularly scheduled TV program to discuss job creation. We heard President Obama say that while we are starting to see stabilization and some improvement, we can expect job losses to continue and that slow job growth is "most distressing". He also said the economy needs innovation to continue to push forward...which means those who are out of work better head back to school to build up their intellectual capital.  Not much reaction to his speech from traders..

All in all...besides the brief move outside the range, the tight sideways morning trend channel is in tact and waiting for more guidance.

Trading in the TBA MBS market has been sluggish at best. Marginal supply from originators and an offsetting bid from the Fed has kept "rate sheet influential" MBS coupons pretty much in step with their benchmarks. Follow the leader with slight spread tightening...

The FN 4.0 is currently  -0-04 at 98-17 yielding 4.153% while the FN 4.5 is trading  -0-02 at 101-04 yielding 4.364%. The secondary market current coupon is 4.279%. The current coupon is +87/10yr TSY and the FN 4.5 is +95/10yr TSY.

Below is the FN 4.5 two day chart. 101-00/01 has been a pivot point over the past two days, serving as strong support this morning. If the 10yr TSY tests 3.45 again, the FN 4.5 may cross below 101-00. However, given the supportive events discussed in MBS OPEN, continually small amounts of supply from originators, and the constant Fed presence in the pass-thru market...unless the 10yr makes a solid move above 3.45, we wouldn't expect to see the FN 4.5 drift too far below 101-00.

In related markets, the dollar is 0.37% weaker vs. a basket of currencies, oil is more expensive, and stocks are essentially flat.

The rest of the week holds significantly more top shelf data with perhaps the most important development of the week getting underway tomorrow with the FOMC meeting which will conclude with the policy announcement on Wednesday. Then on Friday Non-Farm Payrolls prints, which always promises to shake things up on the "day of," but as AQ pointed out this morning, gives way to decreasing volatility in the week to follow.  For now though, we're DEAD CENTER of long term range and don't appear to be under any significant pressure.  If stocks don't skyrocket, and we avoid unforseen headline risk, we could skate through today on a fairly sideways note... 

Greenlee's Speech To a House of Representatives Oversight and Government Reform subcommittee.

  • BANKS RISK BIG ADDITIONAL CREDIT LOSSES GIVEN OUTLOOK FOR PRODUCTION, EMPLOYMENT
  • FORECLOSURES, MORTGAGE LOSSES TO REMAIN HIGH
  • BANKS VULNERABLE TO FURTHER DETERIORATION IN COMMERCIAL PROPERTY LOANS
  • LOAN QUALITY, EARNINGS, UNCERTAINTY RAISE CAPITAL ADEQUACY WORRIES FOR SOME BANKS
  • SOME BIG REGIONAL BANKS WITH LARGE COMMERCIAL REAL ESTATE CONCENTRATIONS WILL BE PARTICULARLY AFFECTED
  • PRICES OF COMMERCIAL PROPERTIES WILL LIKELY DECLINE FURTHER
  • FED SEEING SHARP DETERIORATION IN CREDIT PERFORMANCE OF LOANS IN BANK PORTFOLIOS, CMBS
  • COMMERCIAL REAL ESTATE LOSSES WILL PLACE CONTINUED PRESSURE ON BANK' EARNINGS
  • DELINQUENCIES OF MORTGAGES BACKING CMBS SEEN CLIMBING HIGHER
  • FED DEVELOPING INTERAGENCY GUIDANCE ON CMBS RESTRUCTURINGS, WORKOUTS
  • BANKS FACE SIGNIFICANT CHALLENGES ASSESSING VALUE OF REAL ESTATE