MBS LUNCH: Shorts Covered. Positions Square. Flows Now Nonexistent
I am really struggling to find something to talk about today. I already discussed the delay of FHA HVCC, we went over Personal Income and Spending data, I published color on New Home Sales, wrote on mortgage apps, and already told you that secondary is on cruise control until 2010.
Not many new stories to share with you....especially in the bond market.
Rates showed signs of a rally in the overnight session and carried progress over into the NY trading day...something we were anticipating but not as a function of any BIG PICTURE perspectives. This outlook was based on expected "position squaring" and final exit from the market ahead of Christmas, which we considered to be bond market friendly because positions were SHORT, which needed to be covered, which means buying at the lows! In thin trading conditions this was expected to give us a little boost, but only if some volume got behind the move. Yeh, that short covering happened yesterday afternoon and today, but there wasn't much volume in the move, and not much traction in the modest recovery.
Plain and Simple: anyone still trading has or is about to cash in their chips and head home for the holidays. The recovery rally was a function of SHORT COVERING, not a factor of improved sentiment in the long end of the yield curve.
The 3.375% coupon bearing 10yr TSY note, which pays out on a semi-annual basis, is +0-03 at 96-30 yielding 3.746%. TRADING VOLUME IS VERY LOW. THE MARKET IS THIN. THERE IS A BIG OLD LACK OF LIQUIDITY. Less than 300,000 10s have traded.
In the mortgage market, all morning price progress has been lost. I issued that REPRICE FOR THE WORSE notice (with an asterisk) and let you know that conditions were ripe for a reprice but not likely because secondary already juiced up rate sheets enough to ignore market volatility. I haven't seen any reprices. Have you?
The FN 4.0 is +0-04 at 97-01 yielding 4.282% and the FN 4.5 is +0-03 at 100-03 yielding 4.499%. The secondary market current coupon is 4.495%. The current coupon yield is 76 basis points higher than the 10yr TSY yield and 61 basis point higher than the 10yr swap rate. Yield spreads are moving sideways today.
Check out the FN 4.5 chart below. It looks just like the New Home Sales chart I posted this morning! Ironic...
While today's econ data was generally bond market bullish..it was just a catalyst for short covering. Since then flows have been nonexistent.
Is anyone even reading this????
PS...My blackberry still isnt getting emails....