MBS OPEN: Beware of Profit Taking

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Recap of Yesterday...

  • Existing Home Sales (Oct) +10.1% to 6.1 million annual pace. 7 months of supply. Much stronger-than-expected, highest since Feb 2007.   Distressed sales accounted for 30% of total sales. Median price down 1.7%. READ MORE
  • St.Louis Fed President supports added funding for Fed's MBS purchase program:  “I have advocated to keep the asset purchase program open but at a very low level, and wait and see what happens, and as information comes in about the economy we can adjust that program while the federal funds rate remains at zero”
  • Dow +1.29%  to 10,450.87. S&P +1.36% to 1,106.23. NASDAQ +1.4% to 2,176.01. Dow closed at a new 13 month high
  • The dollar was weaker and Oil more expensive. Gold sets new record price high at $1,170.55/ounce (not inflation adjusted)
  • 2yr note auction stops at .802%, 3.16 bid to cover. Indirects take 44.5%. Directs take 4.7%.
  • The 2 yr TSY note went out yielding 0.731% and the 10yr note ended the day at 3.353%. The 2s/10s curve ended the session flatter at 262 bps after moving steeper to 267bps early in the day.  
  • The 10yr broke through 3.37% support and tested 3.42%. However before the session came to an end, day traders returned prices back to opening levels. No progress made in either direction. 
  • The FN 4.0 closed +0-07 at 99-19 yielding 4.047% and the FN 4.5 went out the door yielding 4.256%. The secondary market current coupon was 4.089%. The CC yield was +73/10yr TSY and +62/10 yr swap. READ MG's CLOSE
  • Several lenders repriced for the better. Many lock desks are operating a man down during this holiday shortened work week

So Far This Morning...

Q3 GDP Revisions Released have been released. The US economy grew at a rate of 2.8% in the third quarter, according to the preliminary read of Q3 GDP. This is the first revision to Q3 GDP data..final read still to come. The preliminary print of +2.8% was slightly below expected and worse than the first estimate of +3.5%.

The downward revision in consumer spending and PCE grabbed my attention. PCE = Fed's preferred gauge of inflation. Below is a table summarizing the revisions.

The S&P/Case-Shiller Home Price Index has also been released.  In Sept, the 20 city index rose 0.3 % from August, worse than consensus of +0.8 % and less than the 1.2 % gain seen in August data. On a year over year basis, the 20 city index is 9.4 % lower from Sept.2008.  Worse than consensus of -9.0%. The 10 city index was +0.4% in Sept vs. +1.3 % in Aug. On a year over year basis, the 10 city index was -8.5 % in Sept 2009 vs. Sept 2008. Home prices in Q3 2009 +3.1 % from Q2 2009. Home prices in Q3 2009 -8.9 % from Q3 2008.

After the release of the data, 10yr note yields are a few bps higher...but holding the overnight gains that pushed yields back into last week's range.

It is important to point out that the overnight move higher in price was not supported by heavy volume. Given the market's general lack of a directional bias and preference towards day trading....the long end of the yield curve is susceptible to profit taking at any moment. Beware of chopatility....

The FN 4.0 is +0-02 at 99-21 and the FN 4.5 is +0-02 at 102-02...

Reminder: 102-00 prices bring out profit taking. Think of 102-00 as having similar effects as PARNERTIA.

FHFA Home Price Index at 10am. Consumer Confidence at 10am. Treasury auctions $42bn 5s at 1pm. Beware of Profit Taking...