MBS LUNCH: Forced Buying Pushes Rates to 2010 Lows

Hi. Good Afternoon.  "Rate sheet influential" MBS prices are higher and mortgage rates are improved....unfortunately Suntrust is the , only major I have seen republish, that was at 1235pm. In terms of smaller shops, the usual price leader has boosted pricing by 12bps followed by MetLife, FAMC, and Sierra Pacific just now. What else you got?

The FN 4.0 and FN 4.5 are both at new 2010 price highs. The FN 4.0 is +0-09 at 98-05 yielding 4.177% and the FN 4.5 is +0-08 at 101-02 yielding 4.391%. The secondary market current coupon is 4.359%. The CC yield is +75bps/10yr TSY yield and +63bps/10yr swap rate. If the FN 4.5 can hold gains over 101-00 we should start to see the majors more interested in reprices for the better. 101-00 is a profit taking level for bankers by the way....might see some choppy price action when the FN 4.5 crosses too far into the 101 handle.

Benchmark Treasury yields are at 2010 lows....but finding firm resistance at a key retracement level.

 As indicated in MBS MORNING, the rates market is benefiting from a flight to safety rally today. This is all occurring in the midst of new bank reform plan that President Obama says is NOT GLASS STEAGALL...that is TBD as no real details have yet to be supplied by the authorities. Nonetheless, the already luffing equity market took another blow to the junk following the announcement.

The S&P is down 1.62%
The Dow is down 1.81%
The NASDAQ is down 0.94%

 The S&P has broken key resistance and retraced all the way back to Dec31 price levels....so wipe away all progress made in 2010.

Because, like me, the market hasn't been able to really dive deep into the details of the proposal, one should assume trader's are operating under a SELL NOW ASK QUESTIONS LATER strategy. The resulting effect in the bond market was a HUGE volume spike in TSYs. Check it out...

WHOA! PLEASE OFFER!!!

MUST READ THIS....

Generally seeing volume pick up in a rally is very supportive of an extension to rally progress because it forces the market to keep prices above entry positions in order to create more profit. There is a rather important "BUT" that I must call to your attention though...

The SELL NOW ASK QUESTIONS LATER sentiment in stocks is shared in TSYs too, except its the opposite: BUY NOW ASK QUESTIONS LATER

The market is unclear of what the hell Obama is proposing. In times of great uncertainty and panic, to protect profits and limit risk, traders allocated funds to the SAFEST assets in the marketplace...Treasuries.  This rates rally is partially a function of FORCED BUYING thanks to panic selling  in stocks. (forced FTQ buying plus FORCED short covering plus FORCED real money duration buying)

Plain and Simple: while the spike in TSY trading volume is supportive of an extension to the rates "relief rally", the underlying motivation behind boosted bond market optimism is forced buying. This leaves the FLIGHT TO SAFETY rally in the bond market susceptible to a selloff (unwind of protective positions), especially if new details come to light that clear up confusions and calm the concerns of bankers and traders who now have to wonder if there business models are useless.

Please stay defensive of your pipeline profits.

With all this short term posturing going on  I feel like its important to let you know that today's political tapebomb has not yet altered our outlook for higher rates in Q1 2010. Once more details are presented, IT MAY, but not until we figure out the details of what Obama is plotting.