MBS OPEN: Sideways in Slow Trading. Recap and Outlook Attached

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Recap of Last Week...

  • New Century exes charged with fraud. READ MORE
  • CMBS delinquencies higher in 3Q 2009. READ MORE
  • Mortgage Apps Higher. Post-holiday refinance apps drive demand. READ MORE
  • Fed Governor: Foreclosure Prevention Requires Tailored Strategy. MBS market needs "Back Stop". READ MORE
  • Realty Trac: Foreclosure Filings down 8% in November. READ MORE
  • Geitthner: TARP Extension to be used to stabilize housing market. READ MORE
  • Fed Governor Duke calls attention to overtightened lending regs. READ MORE
  • Household Net Worth Higher. Mortgage Borrowing Down $370 billion. Illustrates bank still reluctant to lend. READ MORE
  • Fed MBS Purchases On Hold at $16 billion. READ MORE
  • HAMP Report: 31,382 out of 728,408 loan mods have gone permanent. Not enough to slow foreclosures! READ MORE
  • Mortgage Cramdown Legislation Canned on Capitol Hill. READ MORE
  • House Passes Consumer Protection Bill. Sets Lending Standards. READ MORE

Rates recovered early on last week after a better than expected jobs report cheapened debt prices and created a bargain buying entry point for "real money" accounts near the outer limits of the Q3/Q4 rates range. As a result, mortgages started the sparsely filled econ calendar week with buyers greatly outnumbering sellers, which helped mortgage rates tick a few basis points lower. Unfortunately, it wasn't long before the tide turned....

The fixed income market was up against a hefty load of longer dated debt auctions from the Treasury: $40 billion in 3yr notes, $21 billion in 10s, and another $13 billion in 30s. While the shorter maturity 3yr notes were met with apathetically average demand, longer dated 10s and 30s were not so lucky. In fact, as the week progressed, the long end of the yield curve weakened, aka the rate sheet influential end, as longer maturity debt was viewed with great disdain. This should be read as a disdain for "duration".

Heading into the weekend, a fresh round of "better than expected" perspectives hit headlines in the form of retail sales and consumer sentiment. While statistical variations and seasonal influences were indeed present in the retail sales data, 10s still sold off, moving outside the range to 3.56% before "real money" accounts re-entered the market as buyers.

This is obvious when looking at a week over week 10yr note chart...higher yield highs and higher yield lows are not the mortgage originators friend.

Again...the market's recent disdain for duration, aka "rate sheet influential" benchmarks, is obvious via the current yield curve steepening trend. 275bps wide is an all time high for the 2s/10s curve. We tested that last week...and the market appears ready and willing to continue to test new highs heading into 2010.

Mortgage rates ended the week on a three day losing streak, with our best rate sheet samples pricing par at 4.75. READ VIC's POST ON MORTGAGE RATES

The Week Ahead...

The week ahead offers much more to discuss in the form of economic data.  Read MND's "The Week Ahead" for a recap of the calendar.

Inflation data, housing releases, and the FOMC meeting highlight the busy schedule. Many view the release of CPI and PPI data as a possible indicator of things to come in Q1 2010...meaning inflation concerns are expected to be one of the culprits of a continually steeper yield curve (10s and 30s get outperformed by 2s). While the calendar is indeed "jam packed", 2009 is coming to an end and it may be  a little late in the game to be "dressing windows" for year end, more or less this is the last full week of trading in 2009 as market participants look to make an early exit for Christmas vacation. This implies a lack of liquidity will set in and "chopatility" may ensue. Adding to that outlook, the FOMC meets on Tuesday and releases their statement on Wednesday at 2:15 pm. As is the norm for an FOMC week, the market is likely to head sideways in a holding pattern while Ben and his colleges deliberate over tweaks to their outlook. 

After the FOMC release and post-meeting positional adjustments, econ data will be the talk of the town, but again, as many positions are flat (read as money is not moving from positions heading into year end) not much yield curve flattening progress is expected to be made at this point in the month/year. This is also a function of an anticipated spike in year over year inflation data and the generally shifting outlook for continued "better than expected's"...which is something we expect to occur early on in 2010, but not to continue in Q2. Not to say a "double dip" is imminent,  more to imply that the notion of stagnation will set in as the labor market is unable to gain traction and housing remains a source of great economic slowness.

All in all, if you've been reading closely you will notice a somewhat bearish outlook for mortgage rates is embedded in the above commentary...ie a steeper yield curve and inflation issues. I also should remind of the Fed's eventual exit from the agency MBS market. While several hints have been dropped in recent Fedspeak that the program's termination is dependent upon current economic conditions...the rates market will not wait around for the Fed's decision, instead the departure of the Fed's "official bid" in the MBS market will be built into mortgage valuations (and hedging instruments) well in advanced of the Fed's exodus from the TBA MBS market.

Again...all reasons to believe mortgage rates are headed towards 5.50% in Q1 2010 (assuming the yield curve continues to steepen and 10s touch 4.00%.)

To Start the Session...

  • SHANGHAI +1.71%, HANG SENG +0.84%, NIKKEI -0.02%, CAC +0.58%, DAX +0.89%, FTSE +1.00%
  • No domestic econ data this morning
  • Obama will ask banks to return the favor to tax payers and start lending to small businesses and consumers. READ MORE
  • Dubai World gets $10 billion bailout from Abu Dhabi . Many say it wont go far in fighting off the emirate's debt pile. READ MORE

The dollar is weaker to start the day.  So much for the extension of last week's rally? Eh...the dollar index is only down 0.08% this morning. The bigger question is: Does the WEAK DOLLAR/STRONG STOCKS trade continue or will be see this correlation weaken as our economic outlook brightens (in the short term) ?  I say yes...the correlation will eventually reverse course.

Stocks futures are higher, but off their early session high prints. Early on...the market will look to test 1103, if all probes are passing efforts then the market will move higher to 1,113 and then to 1121 before finding FIRM resistance.

In the rates market, the benchmark 10yr TSY note is mostly unchanged, trending sideways between 3.52 and 3.56. It's hard to imagine that the market will go much flatter ahead of the FOMC meeting statement on Wednesday, but again light volume and thin trading conditions can make for excess chopatility. So be prepared for a move in either direction.

This trend channel is a positive start to the week though...lower highs, albeit a firm floor at 3.52%. Must break this resistance level to re-test the range's outer limits at 3.50%.

In mortgage world, "rate sheet influential" MBS prices are trending sideways along with their benchmarks. 

The FN 4.0 is +0-02 at 98-17 yielding 4.153% and the FN 4.5 is +0-02 at 101-10 yielding 4.34%. The secondary market current coupon is 4.265%.Trading conditions are illiquid to start the session, flows have been slow and volume light as less than 2,000 trades have printed to data feeds.

Similar to the progressive trend channel seen in the short term 10yr chart above, the FN 4.5 is extending the post retail sales sell off recovery, but again, not much progress is expected ahead of the FOMC meeting statement. (PPI data knee-jerk chopatility is on our radar though...chopatilty expected).

Last but not least, good morning. Your rate sheets should be mostly unchanged to start the week.