MBS MORNING: Probing Passed Pivot Points

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In an orderly sell off, traders test individual price levels to determine what  the market is willing to accept/not accept. This "probing" combined with size of trade helps determine fair value and strength in the market.  On Friday, normal processes were ignored in favor of a "sell now, ask question later" bias. As anticipated, rates traders are now exploring the pivot points which were blown through in the post-NFP knee jerk sell off.

A pivot point is a significant technical price level where the market has previously accumulated (bought) or distributed (sold) a financial instrument in high volume. Pivot points can also be moving averages or key retracements.

The 10yr is currently +0-11 at 99-16 yielding 3.437%. 3.42% is a key pivot point.  We need to break 3.42% resistance to test 3.38% again. If we fail to break 3.42% it would be relatively bearish, but not really in terms of the big picture. The range continues to provide meaningful directional guidance....3.50%= cheap, 3.27 = not cheap. However if mortgage rates are to move lower, 3.42% needs to be broken!

"Rate sheet influential" MBS price appreciations have stalled out after reaching Friday's pre-NFP price levels. The FN 4.0 is +0-09 at 99-03 and the FN 4.5 is +0-08 at 101-25. The secondary market current coupon is 4.19%. The CC yield is 76bps over the 10yr TSY yield and 61bps/10 swap rate.

Until 3.42% is broken...we are likely stuck in the 101-20 to 101-26 range.

We've seen over 4,000 trades print in the TBA MBS market this morning...on an average day, at this point  in the session we would have seen 6,000-7,000 trades.On a busy day we might have seen 8 or 9k by now. Volume aside, more importantly, buyers outnumber sellers! We usually don't lean on this explanation, but it has been the dominate theme in the mortgage sector over the past few months, so I suppose "IT IS WHAT IT IS".

This is a function of a generally slow primary mortgage market (loan production slowdown) and the Fed's well-timed participation in the MBS market. This supply/demand dynamic has made agency MBS a favored choice for year end P&L  "window dressing" .  This is again obvious as we start the week as dealers are short MBS ...not short position wise, short as in supply shortage. Market makers need new production to fill orders from their accounts!

This "supply shortage" has been supportive of MBS valuations most of the year and will continue to be supportive as we close out 2009.

Ben Bernanke is giving a speech to the Economic Club of Washington. Here are a few highlights..

BERNANKE SAYS:

  • Have some way to go before can be sure u.s. economic recovery self-sustaining
  • Best guess is will see modest growth in 2010, enough to lower jobless rate
  • Economy confronts formidable headwinds, jobless rate likely to decline slower than would like
  • Significant headwinds include tight credit conditions, weak job market
  • Fed will monitor inflation closely but it appears likely to remain subdued for some time
  • Fed's balance sheet expansion will not lead to higher inflation, has tools to withdraw stimulus
  • Fed "committed to keeping inflation low and will be able to do so"
  • Even if fed balance sheet stays swollen for some time, fed can tighten by raising short-term fed funds rate
  • Fed's most difficult challenge will be not how to withdraw stimulus, but when
  • Policy actions in u.s., abroad averted global financial meltdown that could have led to a depression
  • Raising interest rates on reserves banks hold at the fed will be important tool to tighten policy
  • If necessary, fed can sell securities holdings to reduce size of balance sheet
  • Regional fed structure provided main street perspective to policymaking during crisis
  • Crisis showed risk management systems inadequate; neither firms nor regulators saw or fixed weaknesses
  • All regulators, including fed must undertake "unsparing" review of their actions
  • Wage, price trends slowing due to econ slack, long-run inflation expectations stable
  • Pickup in global economy, dollar decline have likely pushed commodity prices up
  • High unemployment, stable expectations, should keep inflation subdued, inflation could move lower