MBS MORNING: Curve Steepening. Profit Churning or Sentiment Shift?

Heading into the 1pm bond auction, TSY yields in the long end of the curve continue to rise.

The 10yr TSY note is -0-14 at 99-02 yielding 3.485%.

The long bond is -0-19 at 98-23 yielding 4.453%.

"Rate sheet influential" MBS prices continue to bounce around intraday lows.

The FN 4.0 is -0-12 at 98-24 yielding 4.131%  and the FN 4.5 is -0-09 at 101-19 yielding 4.305%. The secondary market current coupon is 4.209%.  The current coupon yield is 72 basis points over the 10yr TSY yield and 60bps over the 10yr swap rate.

The Treasury will announce the auction results of the $13 billion long bond reopening at 1pm. Yesterday's weak 10yr auction implies one of two things about the current sentiment of bond investors...either the market already had it's fill of 10s and found this week's auction supply to be an opportunity to take profits, let rich valuations cheapen up,  and  set up/reposition for more profit (reverse course), which isn't out the question when you consider the extent to which the market had rallied in previous weeks...this supports the RANGE TRADE meaning yields had tested the 3.38% pivot, repeatedly, and failed on each attempt, it was now time to retest the high side of the range.

OR....

After spending a few week's churning profits in higher yielding, longer maturity Treasury notes, the market's year end "window dressing" strategies were shifting towards shorter maturity Treasury coupons as trader's looked to avoid losses related to a year end  lack of liquidity (Christmas= vacation time) . The recent yield curve steepening and lack of liquidity in the MBS market support that theory.

Ultimately, the long bond is the ugly duckling of the yield curve and does not have major influence over mortgage rates. I am more inclined to focus on the RANGE TRADE in 10s, with 3.50% support holding (3.56% tests possible in knee jerk reaction).

With that in mind, the big question is...HOW STEEP ARE TRADERS WILLING TO LET THE YIELD CURVE GO?

2s/10s are currently testing all time steepness highs of 275bps. If the market's bias is really to avoid longer dated debt (avoid duration), then this auction should not go well, and the yield curve would likely steepen further. However, if recent losses have been a function of auction concessions...aka an excuse to churn MORE PROFITS into year end.....then we should see "buying on dips" and support for the range. The previous outlook implies 10s may test 3.56%, which does not bode well for mortgage rates, the latter implies rising mortgage rates will reverse course as 10s head back towards 3.38 (3.36%)

This will get very interesting...