MBS OPEN: Rates Lower Ahead of 10yr Auction
There is something about AC/DC that gets me going at 6AM. Maybe it's because there's no one on the road and I can speed with the windows down and my radio on full blast?
If you're a little groggy this morning...give it a try, Angus Young has an uncanny ability to put your senses on alert. After yesterday's massive late day sell off, you might need this pick me up.
LATE DAY SELL OFF?????
No I am kidding...
If the above comments scared you...READ MBS AFTERNOON. Yesterday was notification day in the TBA MBS market. That means November Class A MBS coupons began the settlement process. It also means the November FN 4.5 MBS coupon is no longer trading and we are now watching the DECEMBER FN 4.5 MBS coupon. (Class A = 30yr FN/FRE MBS coupons).
And by the way...no I don't think the joke is dead yet :-D
The econ calendar was empty yesterday, but the dollar made fresh 15 month lows, Gold broke the $1,100 mark, and the Dow set a new 13 month high...all of which the bond market ignored. The 10yr TSY note went sideways in a range between 3.51 and 3.46...and the yield curve started to flatten out. As MG pointed out yesterday, volume was low in both the stock and the bond market.
Treasury successfully auctioned $40 billion 3 yr notes at a high yield of 1.404%, lower than the 1pm "When Issued" yield. Indirect bidders took 68.5% of the auction...call Guinness cause that's a record! The bid to cover ratio was 3.33%...very impressive demand.
While the auction results are in line with our outlook that bond market weakness was priced in last week and we are due a recovery/bargain buying rally....the maturity of the debt was short and not indicative of the market's inflation expectations. Today's 10yr note auction should serve to provide a clearer indication of the market's appetite for longer dated debt....remember the Fed's Treasury repo program is over, and because the Treasury Department has made it clear they intend to extend the duration of their debt, we are somewhat skeptical of the market's willingness to bid aggressively on the long end of the yield curve (that doesnt change our outlook though). This skittish sentiment was clearly illustrated last week as the yield curve broke steepening support and tested record high curve spread levels.
This "steepness" is a bargain buying opportunity. Specifically it allows banks to "borrow short and lend long" for a greater profit...this is the carry trade we've been discusing. If you missed it...we commented on the shape of the yield curve and our outlook for the week ahead in yesterday's MBS OPEN
The Fed released their Senior Loan Officer Survey yesterday. I will publish the story this morning. Just out of curiosity...have you ever been surveyed by the Fed?
The 10yr TSY note is trading higher in price this morning...lower in yield. After breaking 3.50 support last week, a.k.a pricing in debt supply, the 10yr note is now well within the range that contained rising rates for the second half of the summer and most of early fall. However, I must point out that volume is meager again.
(No I did not use a crayon to color in this chart)
I dont want to rain on your parade, but I wouldn't be surprised to see rates back up a few bps heading into the 1pm 10yr note auction. Traders are still SHORT the 10yr, so the overnight trip to 3.44% may not last too long. But that outlook is speculative in nature, which I may or may not be trading in my spare time. See my tweets for more on that.....(quick story: my gf, Kaycie, pretty much called me a pansy for using the term "tweets" last night. I dont blame her...twitter needs to come up with a better term to describe the action of "twittering")
At the moment, the December FN 4.0 is +0-06 at 98-23 and the FN 4.5 is trading +0-05 at 101-08. Because we are right in the middle of the settlement process and the econ calendar is empty, "rate sheet influential " MBS coupons will be taking their directional guidance from the gyrations of the yield curve. Given the above outlook described above and the still expensive valuations of MBS coupons (dollar prices and spread levels)... we may see a slight back up in rates ahead of the auction (if stocks make it possible).
Trading volume is thin...$25 billion 10s at 1pm. Vacation tomorrow.