MBS MORNING: Waiting for Short Term Tactics to Play Out

The "all quiet ahead of the auction" theme, which MG described in the open, continues to moderate "rate sheet influential" market flows this morning. Volume in the Treasury market is relatively muted (not too bad compared to rest of the week) as many rates trader's now sit flat, positions squared in anticipation of auction results and corresponding dealer distribution that follows.

The 10yr note yield is currently yielding 3.459%...testing Monday's resistance and Tuesday's SUPPORT/pre-10yr auction level.

BANG BANG on the PIVOT POINT...

Here's how it looks in the futures market. I didn't want to add more noise to the chart, but I do feel it is important to discuss one aspect of our strategy. Where volume accumulates and distributes. In other words, where are the high volume marks? Was the market buying (accumulating) or selling (distributing) at these levels? This is basically market profile analysis...something we are very attentive to while the market continues to range trade.

In the mortgage world, "rate sheet influential" MBS coupon prices are marginally higher, pacing the direction of their benchmark's this morning.

The FN 4.0 is currently +0-02 at 98-21 yielding 4.41% and the FN 4.5 is trading +0-04 at 101-09 yielding 4.344%. The secondary market current coupon is 4.252%.

Here is the FN 4.5's price action this week so far...

Treasury will auction $16 billion 30 year bonds today. Results will be made public at 1pm. This event will set the stage for trader yield curve tactics over the remainder of the week. Leading into the auction, most trading volume is on the wings of the curve, either in the short end or in the long bond.  The yield curve is giving back a portion of its early morning flattening gains (concessions). The long bond is trading at a yield of 4.402%, near the high side of its recent range. The When Issued 30yr bond yield is 4.425%.

Not a bad concession built into the long bond before the auction. That said, 30s are somewhat oversold at the moment, currently testing yield levels not seen since late July. Year end is generally a seasonally supportive time for AAA assets, whether or not the market perceives current market pricing as "cheap"...we'll have to wait to find out.

From a big picture perspective, nothing has really changed regarding the uncertain economic outlook. This implies the market will continue to range trade...meaning reactions to data and events are more of a reflection of current position and short term tactics rather than overall BIG PICTURE bias. Sometimes the news  cooperates with these short term strategies, sometimes it doesn't. Given the market's recent willingness to let the yield curve continue to steepen, which is a function of the TSY supply set up, we are anticipating a corrective flattening trade to take place anytime now. So we sit, hands in pocket, whistling a random tune while we wait for yield curve bargain buying.