MBS AFTERNOON: Rates Find Comfort at Important Pivot Point

Heading towards 5pm "going out",  MBS prices continue to move sideways in a tight range. The FN 4.0 is -0-15 at 99-08 yielding 4.081% and the FN 4.5 is -0-09 at 101-26 yielding 4.279%.

The secondary market current coupon is 4.14%....10bps higher than where it stood yesterday afternoon. In terms of relative value, the CC yield is 77 over the 10yr TSY yield and 65bps higher than the 10yr  swap rate. Yield spreads were move tighter at 3pm marking, but have gapped out a few bps heading into the close. Loan supply from originators has slowed today, after all is said and done about $3bn will have been offered.

Recently, I have been calling attention to the direction rates were heading... towards the pre-Dubai trading range. This post-tapebomb event retracement extended into today,  "rate sheet MBS prices have returned to pre-flight to safety price levels.

This is obvious in Treasuries too.

The important thing to take away from this observation is the fact that the market found a comfort level... where it had last accepted price levels based on strategies and biases that were not influenced by an outlier event...more specifically the Dubai debt story.

Some consider this an unwinding of  "flight to safety" positioning, and while I have relied upon asset allocation as an explanation for trade flows, I also recognize the nature of short term trade strategies. It is not a  coincidence that the market retraced gains/took profits AHEAD of a Treasury supply announcement, which has provided plenty of strategic motivation for positioning this year,  and a major market event: NonFarmPayrolls tomorrow morning.

I know many of you are looking for guidance on the direction mortgage rates will take after the release of labor market data in the morning...READY?

LOCK!

I state this bias for two reasons. The first of which is more important.

1. Lenders have less incentive to push mortgage rates passed 4.50%. It is more profitable to sell 4.50 MBS...the Fed's weekly report on MBS purchases illustrates this point. 50% of the coupons they bought were 4.50s. That said, the primary mortgage market is, at best, priced at 4.625% at the moment (not including mandatory/direct pricing). Unless you are floating a high balance loan, the payment difference between 4.50% and 4.625% is minimal.

Plain and Simple: while mortgage rates could fall tomorrow, there isn't much room below, dont risk losing a loan because of a FEW extra bps.

2. Traders have restored rates status-quo. They traded the Dubai event, took profits, and have returned the market to a VERY key pivot point..3.38%. A pivot point directly in the middle of the range we have traded since mid-summer (3.27-3.50).

This makes our job much more difficult. This is right in the middle of the range!

The fact that rates moved so aggressively through 3.27% support, all the way back to the all important mid-range, 3.38% pivot point does however imply that the market will be looking to ensure it didnt move too far, too fast.

Plain and Simple: the rates market needs to retest broken support levels between 3.27 and 3.38 before moving higher.

Unfortunately the degree to which positional support matters heading into a headline event like NFP is limited. The reactive nature of a post-NFP trade can shape strategies for days to come...if the market does trade higher, I see resistance at 3.32%, if the market trades lower, I see support at 3.42%,

Trade flows and directional bias aside....mortgage rates have minimal room to push lower and lots of room to move higher.

ps...I know this completely de-values the argument I just presented, but I still feel its necessary for me to point this out. This morning the White House said they see signs that the unemployment rate is going to tick up tomorrow. Dont know if that is function of fluctuations in the labor force or a factor of increased job losses.

Are you rolling the dice?