MBS OPEN: Range Still Containing Price Action

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Recap of Yesterday...

  • Housing Starts fell 10.6% in October to lowest level in six months. Led by a 6.8% decline in construction of single-family dwellings and 34.6% drop in multi-family starts.
  • Building Permits, the more important, forward looking housing market indicator, fell by 0.2%. Not too bad considering the tax credit extension was still in limbo. HERE is commentary on the data
  • Consumer Price Index (CPI): consumer level inflation rose 0.3% in October vs. +0.2% in September. Slightly above the market's expectations. 
  • When stripping out food and energy prices, core consumer prices were 0.2% higher in October, the same increase was seen in September. Year over year, core prices are up 1.7%. 
  • Fed President Bullard, who is not currently an FOMC voter but will be next year, caused a little commotion in the front end of the yield curve with his presentation titled "The First Phase of the US Recovery". Everyone has a different take on what Bullard was trying to say in his comments. If I was forced to take a stance it would be the same, slow recovery/no need to hike rates outlook. Meaning I interpreted his statements to imply the current crisis is like no other and the Fed may not be need to raise rates for awhile.  DOVISH?. I dont put a time stamp on it.
  • Bullard did make some MBS related comments: "The main challenge for monetary policy going forward will be how to adjust the asset purchase program without generating inflation while interest rates are near zero" ...Bullard thinks if the Fed starts to sell MBS that it would increase interest rates...MBS yield spreads tightened following Bullard's statements...
  • The New York Fed will begin in late November to use internal staff on select days to execute the program's agency MBS purchases. READ MORE

It was a choppy day in the rates market.

Mortgages carried Tuesday's late afternoon weakness into yesterday's open as originators continued to sell loan supply (this essentially locks in pipeline profits/hedges interest rate risk). The Fed was buying in size while profit taking was noted from relative value accounts and hedge funds (covering shorts). You could say bids were getting "hit" all morning (bids get hit = market trades lower in price). However, as has been the case over the past two weeks, buyers were seen re-entering the market after profit taking weakened valuations. By day's end, cheaper MBS dollar prices had attracted enough buyers to balance trade flows and  level out yield spreads. Note: when the FN 4.5 breaks into the 102 price handle...profit taking picks up.

The FN 4.0 ended the day at 99-08 yielding 4.081% and the FN 4.5 went out the door at 101-22 yielding 4.294%. The secondary market current coupon was 4.134%. The CC was +77/10yr TSY and +68/10yr swap at 5pm.

The yield curve steepened yesterday as rates chopped around within their recent range. For 10s, a fence bordering 3.32 and 3.38 has contained price action all week. As MG has been pointed out all week, 3.32% resistance corresponds with a quadruple top in 10yr futures. READ MORE

Here is another look at that quadruple top. 

If this resistance level is not broken, price losses may be on the horizon.

So Far This Morning...

  • SHANGHAI +0.53%, HANG SENG -0.86%, TOPIX -1.45%, NIKKEI -1.32%, DAX -0.71%, CAC -0.82%, FTSE -0.47%
  • The OECD doubled their economic forecast based on growth in China. OECD says the US GDP will grow at 2.5% pace in 2010 as opposed to previous prediction of 0.9%. BUT... OECD Secretary-General Angel Gurría.  added, “With millions of jobs lost and public budgets under strain, governments will have to tread carefully in the months ahead. Removing stimulus measures is imperative but such action has to be carried out gradually to avoid undermining the recovery.”
  • US ECON: Jobless Claims.Here is what came across my news ticker...

08:30 19Nov09 RTRS-US JOBLESS CLAIMS UNCH AT 505,000 NOV 14 WK (CONS. 505,000) FROM 505,000 PRIOR WK (PREV 502,000)
08:30 19Nov09 RTRS-US JOBLESS CLAIMS 4-WK AVG FELL TO 514,000 NOV 14 WK FROM 520,500 PRIOR (PREV. 519,750)
08:30 19Nov09 RTRS-US CONTINUED CLAIMS FELL TO 5.611 MLN NOV 7 WK (CONS. 5.60) FROM 5.650 MLN PRIOR (PREV 5.631)
08:30 19Nov09 RTRS-US INSURED UNEMPLOYMENT RATE UNCH AT 4.3 PCT NOV 7 WK FROM 4.3 PCT PRIOR WK (PREV 4.3)
08:30 19Nov09 RTRS-US JOBLESS CLAIMS 4-WK AVERAGE LOWEST SINCE WK ENDED NOV 22, 2008 (512,500)
08:30 19Nov09 RTRS-US CONTINUED CLAIMS LOWEST SINCE WK ENDED MARCH 14 (5.567 MLN)

The market was expected 505,000 new jobless claims...no surprises. However last week's data was revised for the worse (from 502 to 505). Not going to try and spin this one to explain trade flow logic, just going to point out the following: 10s tested 3.37/38 yesterday afternoon and in the overnight session. Those probes at support were unsuccessful and THE RANGE MODERATED further price losses.

The 10yr is currently trading at 3.347% after failed to breach 3.32% resistance (again). BANG BANG ON THE RANGE...

Rate sheet influential prices are higher this morning. The FN 4.0 is currently +0-03 at 99-10 yielding  4.075% and the FN 4.5 is trading +0-02 at 101-24 yielding 4.286%. The secondary market current coupon is 4.128%. The CC is +78/10yr TSY and +67/10yr swap.

The range is narrowing....

Reuters polled economists on the health of the housing market and their outlook. Check out the results...

1. When do you think a trough in U.S. housing prices will be reached?

 9 said is already reached
 9 said in less than 6 months
 9 said in 6 to 12 months
 1 said in 1 to 2 years
 None said in more than 2 years
 
2. What is your forecast for the change in average house prices over the year? 

(CASE-SHILLER 20 CITY)

The median of 22 forecasts was -13.0 percent in 2009.
The median of 22 forecasts was 2.9 percent in 2010.
 
(OFHEO/FHFA)
   
The median of 11 forecasts was -4.2 percent in 2009.
The median of 11 forecasts was 0.8 percent in 2010.
 
3. How much, in percentage terms, are U.S. house prices likely to fall before stabilizing:
 
The median of 25 forecasts was for a fall of 33.0 percent from the peak.
The median of 24 forecasts was for a fall of 0.5 percent from here.
 
4. Is a rebound in housing prices a prerequisite for a sustained  economic recovery? YES/NO
   
13 said Yes
23 said No
 
5. On a scale of 1 to 10, where 1 is extremely undervalued, 5 is fairly valued and 10 is highly overvalued, what best describes  average U.S. house prices relative to fundamentals?
 
The median of 38 forecasts was 5.
Forecasts ranged from 2 to 7

HOW WOULD YOU RESPOND TO THESE QUESTIONS?

The yield curve is steeper ahead of Treasury's auction announcement. We get 2s/5s/7s supply amounts and terms at 11am. Before then, Leading Indicators and Philly Fed at 10am.

WHILE THE RANGE IS MODERATING TSY PRICE ACTION, "RATE SHEET INFLUENTIAL" MBS PRICES ARE HITTING A CEILING AT 102-00 (negative convexity). I would be buying 5.5s and 6.0s in this environment.  This implies rate sheets are range bound at best. Still in lock mode....

 

ps...THIS is funny