MBS MORNING: Wait and See Attitude Moderates Corrective Progress

I hope your holiday went smoothly and all anxieties have been erased.

The ride in was extra quiet this morning. No DC traffic to yell at,  no parked police cars to stop and stare at , no sun glare to slow the pace of nervous nelly. Just open roads and re-run radio shows. Most people must be enjoying a few extra days away from work (lucky mutter mutter).  I detached myself from the marketplace for the most part  over the past few days. I say for the most part because although many market participants have "out of office" replies hanging from electronic mailboxes, the year isn't quite over yet. There is still some last minute business to address in this holiday shortened week ahead : $44,000,000,000 2 yr TSY notes go off today at 1pm, $42,000,000,000 5 yr TSY notes will be auctioned tomorrow, and $32,000,000,000 7yr TSY notes on Wednesday.

Interest rate strategists and editorial columnists have all raised the same skeptical eyebrow about this week's round of debt issuance: With dealers flat and  remaining accounts day trading the chopatility, the main question surrounding the auction of $118 billion in government debt is :

WILL THE FERNERS (foreigners) SHOW UP AND BUY?

These "ferners"  being Japan and China specifically. (Dont read "ferners" as derogatory either...I just like to pretend I have a southern accent sometimes).

While some outlooks lean on lower prices and higher yields as a catalyst for overseas buying... I find it difficult to believe that demand from abroad will be DEMANDING enough to support a notable move lower in yields.

I know benchmark yields have risen considerably over the past three weeks. I know prices have cheapened significantly in the process.  Besides that, I don't have BILLIONS AND BILLIONS of bank reserves to put to work, so its not as expensive for me to hedge the implications of an unknown new year trade with a  "wait and see" attitude on rates. But to be honest, I am stuck in the apathetic, "I see no reason to buy" until 2010 boat. I have yet to observe a strong enough signal that might sway my sentiment from defensive to speculative. I haven't gotten the "SWING AWAY" sign from the third base coach yet. Well...maybe "real money buyers" have provided a few hints...they have been "buying on the dips" on a relatively consistent basis, but this is a  normal event for any account looking to manage cash flows and optimize lending returns while managing risk appropriately (buying AAA rated assets.) I think  my overall perspective speaks for many other market participants as well.

We know the overseas accounts are buyers no matter what, especially when taking the "bargain buyer" perspective. What we don't know is if the rest of the bond market will care....

Plain and Simple: While "real money" (indirect at least) will most likely be the main source of a supportive bid in TSYs this week, the majority of market participants will be sitting it out until 2010. I would prefer to be slightly behind in a rally then stuck upside with too much supply in a sell off. "WAIT AND SEE" seems quite appropriate.

So Far Today....

In Asia, the SHANGHAI closed +1.51%, the HANG SENG 0.17% lower, the TOPIX was +0.59%, and the NIKKEI +1.33%. In France the CAC is +0.9%. In Germany the DAX is +0.72%.  Domestic equities are taking their cues from optimistic overseas markets.

The S&P is riding a high into 2010. In LIGHT VOLUME, the index is again at a new 2009 high  print this morning, currently +0.20% at 1128. Notice the breakout from the pretty sideways range which contained directionality in all of November and most of December...thank you black box prop desks.

Bond prices are cheaper and rates are higher to start the week. The 0.75% coupon bearing semi-annual paying 2yr TSY note is -0-02 at 1.00% and the 3.375% coupon bearing semi-annual paying 10yr TSY note is trading -0-10 at 96-05 yielding 3.844%. 10s hit 3.86% earlier in the morning, but have since bounced lower. This is not super complicated....real money buyers, overseas Central Bankers to be specific, coupled with CTA short covering (prop desks who trade based on signals offered by a "black box" aka quantitative model) have led to this small rebound effort. Don't get excited about it...see reasons above.

Anyway, here is a short term chart of 10s. Notice how yields failed to break Thursday highs. Yeh...the bond market is bearish.

The yield curve is steeper vs. last week's "going out" levels, but is off overnight session steepness highs. It is however obvious that the market is not willing to let "corrective" rallies go too far. Again...notice how the yield curve recovered up to Thursday's high water mark and then lost momentum.  This also illustrates the influence of SHORT TERM strategies in play....and guess what, the short term strategy is to be SHORT (which implies the curve will continue to steepen and rates will continue to rise into 2010).  Bond market sentiment remains bearish!

In the mortgage market I dont have much interesting info to report. Just as related markets are at extremes, stocks at highs/bonds at price lows, "rate sheet influential" MBS prices are hovering around intraday session price lows, which happen to be low prints for the month as well.

The FN 4.0 is -0-09 at 96-11 and the FN 4.5 is -0-08 at 99-17.I circled the PRICE LOWS so it was extra visible.

If you are looking for some other form of rational or logic to apply to the recent bias for higher rates: Although I remain reluctant to give much credit to the stock lever, MG keeps on reminding me to pay attention to it's influence, this morning, one could point towards the modest global equity market rally as a culprit for rising benchmark rates. I think he was right when he told me that both of our observations had a hand in higher rates with a nod towards the "lack of liquidity" (slow trading flows, bids wanted) ...I suppose the sell bonds, buy stocks trade would imply some sort of economic optimism is in the air.  I for one have been looking for a reasons to let prices fall...makes short covering much more profitable!!!But then again....

Plain and Simple: It's still a trader's world and we're still just living in it.

In regards to mortgage rates...I posted this last week several times. I will stop copy and pasting when it is no longer relevant to rate sheet rebate.

From a loan pricing standpoint. I recall this time of year as being one of my favorite for determining rate sheet rebate. I viewed it as so...

Most borrowers have already locked in  and many have actually already closed. Who wants to deal with a loan closing at this time of year?  My main goal was to limit the amount of work I had to do over the next 10 days. I made sure all my positions were square, I double checked pricing, hounded post closing to get my files shipped, and started working on monthly P&Ls. My eyes were generally off the market as my mindset was " GET WORK DONE, LEAVE THE OFFICE ASAP". Processors, UWs, Closers, Shippers, and Accounting were all in the same boat. (Compliance always cared)

This was not an originator friendly environment. To avoid extra work and disruption...I always baked a few extra bps into my rates. My innate sense of capitalism took over. This sentiment was shared up and down the mortgage pricing supply chain. Not matter how the market was moving....primary/secondary market pricing spreads were getting wider.

Plain and Simple: Don't be surprised or angry if rate sheets start to get more expensive...regardless of how the market behaves.

HERE is an outlook for 2010.