MBS MORNING: Range Moderates. Market Focused on Politics

The stock lever has put a manageable amount of pressure on the rates market this morning.

Domestic market participants came back to work after a  long weekend to find equities weaker ahead of what will be a busy week of earnings news. However, stock futures began to rebound off morning lows after Citi reported a fourth quarter net loss of $7.6 billion ($0.33 Per Share). The loss was only $1.4 Billion ($0.06 Per Share) excluding TARP repayment and end of loss-sharing agreement. Citi's provision for loan losses in the fourth quarter was $8.2 billion, down 36% from the prior year and 10% from the prior quarter. Citi was not shy about hiding the fact that their loan loss provisions were beginning to shrink.

Odd that stocks bounced on those seemingly CRAPPY numbers right?

It was more technical than fundamental...check out the firm layer of support under stocks at 1130-1135. In terms of top side resistance, I see trader's targeting 1,200 in the S&P. Yeh, I know that is pretty far away!  In between now and then...equities appear to be enjoying the building bullish inertia behind the freight train. What has been able to slow this momentum so far? What is going to stop them looking ahead? Looks like only technical toppiness plus a few more rounds of "holy crap this economy is going to take a long time to recover" type data.

If you are looking for fundamental logic behind the Citi induced rally, this is how Citigroup CEO Vikram Pandit views the situation:

"We have made enormous progress in 2009".... "It was our responsibility to get our own house in order. We greatly improved Citi's capital strength, reduced the size and scope of the company, and refocused our business strategy to take advantage of our unmatched global network. We created Citi Holdings to rationalize non-strategic businesses, totally overhauled risk management, cut costs by over $13 billion annually, reduced head count by 100,000, and reduced assets by $500 billion from peak levels. And to take advantage of all these changes, we assembled a talented new management team focused on the new Citicorp franchise to move us forward."

Plain and Simple: Citi is stabilizing but still trying to figure out how they are going to make money in the future. Ignoring Fixed Income, Currency, and Commodities trading revenues, this should be a theme amongst big banker balance sheets.

Besides that,  the media is really focused on the Massachusetts Senatorial race. While I generally refrain from joining into the political poo slinging (ugh I am not a fan of writing on politics), it should be noted that the bond market might like to have a few more Republicans on the Hill to filibuster heated debates. From a BIG PICTURE point of view, republicans generally favor less government spending...the bond market would consider this a sign of less government borrowing in the future and therefore less TSY supply and firmer yields across the curve (a flatter yield curve thanks to less inflationary fears).  In terms of stock markets...well my comments above on equities. Freight train heading to wards end of the line at 1,200.

Check out what sector is leading stocks higher. HEALTHCARE....that is the market betting on an UPSET republican victory in the Mass. Senate vote.

In terms of price action in the rates market, it's been a choppy morning. Support has held for 10s and "rate sheet influential " MBS coupons though, unfortunately so to has resistance. RANGE BOUND. 

The 3.375% coupon bearing 10 year TSY note is trading -0-05 at 97-11. Selling stopped out shy of 3.74% thanks to a round of short covering. Don't expect rates to venture too far out of the "status quo" range today.

Same thing goes for "rate sheet influential" MBS coupons to make much positive progress while the Mass Senate race is up in the air. Trading volume in the TBA MBS market is below average (most focused on GN rolls), so bid/offers should be more or less based on the movements of benchmark big brothers (see outlook for 10s above).

The results of the Mass Senate seat election will not be clear until later this evening. With that in mind, it would make sense for both TSYs and MBS to remain range bound as trader's take profits on strength.  Stocks should hold onto gains barring any adverse headlines for the republicans.

NEXT EVENT: 1pm NAHB Housing Market Index. Expecting a move up to 17 from 16 in December.