MBS MORNING: Trending Sideways in Light Volume. Curve Steeper
Rates trader's are celebrating the last Friday trading session of 2009 by.......NOT TRADING!
Today has indeed been a reeeeeal snoozer in the rates market. Both 10s and "rate sheet influential" MBS coupons haven't made much progress in either direction.
In the TSY futures market, 300,000 contracts have traded, mostly back and forth around 118-00 with several failed attempts at 118-04. Notice a lack of progress in either direction.
In the cash market, the 10yr note is hovering around the all-important 3.50% pivot point. The 3.375 coupon bearing 10yr TSY note is currently -0-05 at 98-30 yielding 3.503%.
In the range then out, in the range then out. SEEE....
Slow flows and sideways price action are obvious the TBA MBS market too...only 3,000 trades have printed to data feeds. The FN 4.0 is -0-04 at 98-26 yielding 4.117% and the FN 4.5 is -0-01 at 101-16 yielding 4.355%.
In terms of the relative performance between "rate sheet influential" MBS and their duration benchmarks....MBS yields started the session outperforming their big brothers, but have since given back some of their yield spread gains. "Down in coupon" outperformed yesterday...this is like saying the MBS Yield Curve flattened as longer duration coupon yields fared better than short duration coupons (the coupon stacked compressed) . This is a function of the same old "more buyers than sellers" ...."more demand than supply".......dynamic. The "down in coupon" bias extended into today' session, but appears to being losing some luster as the yield curve steepens.
Here's the scorecard by my measures....
Hopefully you just caught that note on the yield curve steepening. We have been discussing the steep shape of the yield curve for a few weeks now. After breaking the 275bps mark earlier in the week, the curve got crushed in the post-FOMC trade (flattened). Well...after two days of curve flattening, the yield curve has moved steeper today. The disdain for duration that has been exhibited by the market since the Fed exited the TSY market is bad sign for mortgage rates heading into 2010...remember a steeper curve means yields in the short end of the curve are outperforming (falling faster or rising slower) yields in the long end.
Again...I remind that current trade flows and price direction are not a indication of things to come...much working money has been put into a holding pattern as accounting departments clean up books for shareholder annual review. Thinly traded markets and light volume continue to remind us of this....dont let the illiquid marketplace affect your perception of reality.
In related markets...
The Dollar is extending its rally. Oil got smashed at about 10:30AM...prices are now basically flat on the day. Gold is trading higher after a slow sideways start to the session. The S&P is essentially unchanged after an optimistic open...and TSYs could care less.