MBS OPEN: Positive Progress Extends. Housing Data a Non-Event

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Good Morning All.

Interest rates moved marginally higher yesterday as traders went into a holding pattern ahead of a busy week of economic data and market moving events. READ MORE

At 5pm,  my scorecard read:

  • The 3.375% coupon bearing 10yr TSY note was -0-07 at 97-29 yielding 3.63%. Trading volume was below average
  • The FN 4.0 was -0-06 at 97-24 yielding 4.215% and the FN 4.5 was -0-04 at 100-26 yielding 4.422%. Trading volume was below average but picked up toward the close.
  • The secondary market current coupon was 4.391%, only 1 basis point higher on the day. MBS yield spreads vs. TSYs and swaps were wider for most of the session but took back lost ground late in the day. The current coupon yield went out 76bps over the 10yr TSY yield and 64bps over the 10yr swap rate.
  • The 2s/10s yield curve was 1bps steeper at 281bps.
  • After ending last week on a three day losing streak, US stocks recovered a few points yesterday as confidence picked up regarding Ben Bernanke's reappointment. The S&P was +0.46% to 1196, the Dow was 0.24% to 10,197, the NASDAQ gained 0.25% to 2,210.
  • Oil prices rose 0.78% to $75.12

Here is a chart of 10yr yields vs. the S&P

Treasuries traded well overnight partially thanks to another political headline out of the Obama Administration.

From the WSJ:

"President Barack Obama intends to propose a three-year freeze in spending that accounts for one-sixth of the federal budget—a move meant to quell rising concern over the deficit but whose practical impact will be muted.

To attack the $1.4 trillion deficit, the White House will propose limits on discretionary spending unrelated to the military, veterans, homeland security and international affairs, according to senior administration officials. Also untouched are big entitlement programs such as Social Security and Medicare.

The freeze would affect $447 billion in spending, or 17% of the total federal budget, and would likely be overtaken by growth in the untouched areas of discretionary spending. It's designed to save $250 billion over the coming decade, compared with what would have been spent had this area been allowed to rise along with inflation."

While less government spending and a spotlight on fiscal responsibility are a net positive for the bond market in the long run, it doesnt change the fact that the Treasury will still need to raise almost $2 trillion this year to fund the deficit.  With that in mind I once again call your attention to the formation of a mini bubble in the Treasury market.

Since the new year began we've slowly recovered from late 2009 rates market weakness. This "relief rally" picked up momentum last week after stocks reacted negatively to Obama's Glass-Steagallish bank reform proposal and concerns over Bernanke's renomination, this forced a FLIGHT TO SAFETY into Treasuries.  Following that move, 10s really failed to make much more positive progress, stalling at 3.62% after a brief test of 3.58%. Then came another bond market friendly political headline last night. 10s tested 3.58% once more but again failed to break resistance. With 10s looking overbought and our 3.53% target in sight, we remain defensive of further improvements to interest rates.

We see 3.58% as a good place to start selling with 3.55% being the next opportunity to take profits and get short. After that we run into 3.53%, our SELL NOW AND HEAD THE OTHER DIRECTION (short) LEVEL.

Plain and Simple: if you are still floating your pipeline I recommend you keep a close watch on the marketplace over the next few days. We see the recent "relief rally" losing steam and 10s starting to sell more as yields approach 3.52%. The stock lever is also an important indicator over rates directionality. Equities are looking to find stable footing after last week's losing streak. Don't discount the unwinding of "flight to safety" positions in the yield curve.

 

Case Shiller HPI data has been released. I'm not going to lie, I have barely looked it over. I know it was worse than anticipated and the market hasnt had much reaction. But again, I am starting to sell at 3.57% and taking more profits at 3.55%.

 

This what flashed across my news viewer:

09:00 26Jan10 RTRS-US NOV 20-METRO AREA HOME PRICES -0.2  PCT (CONSENSUS +0.1) VS REV -0.1 OCT-S&P/CASE-SHILLER
09:00 26Jan10 RTRS-US 20-METRO AREA HOME PRICES -5.3 PCT NOV 2009 (CONSENSUS -5.0 PCT) VS NOV 2008--CASE-SHILLER
09:00 26Jan10 RTRS-US HOME PRICES IN 10 METRO AREAS -0.2 PCT IN NOV VS 0.0 PCT IN OCT - S&P/CASE-SHILLER
09:00 26Jan10 RTRS-US HOME PRICES IN 10 METROPOLITAN AREAS -4.5 PCT IN NOV 2009 VS NOV 2008 - S&P/CASE-SHILLER
09:00 26Jan10 RTRS-NOVEMBER HOME PRICES IN 20 METRO AREAS +0.2 PCT SEASONALLY ADJUSTED VS OCT - CASE-SHILLER
09:00 26Jan10 RTRS-NOVEMBER HOME PRICES IN 10 METRO AREAS +0.2 PCT SEASONALLY ADJUSTED VS OCT - CASE-SHILLER

Here is a table breaking down the data:

Both stocks and bonds havent moved much in either direction following the release.  And now what you've been waiting for...

Rate sheet rebate should improve this morning. The FN 4.0 is +0-09 at 98-01 yielding 4.189% and the FN 4.5 is +0-05 at 100-31 yielding 4.405%. The secondary market current coupon is 4.373%.MBS yield spreads are WIDER vs. TSYs and unchanged vs. swaps. The current coupon yield is 77bps over the 10yr TSY note and 66 bps over the 10yr swap rate.

$44 billion 2s will be auctioned today. This issue is trading pretty rich vs. other maturities across the curve. I see 0.80% as a key pivot point.

Below is the 2s10s curve. 275bps remains firm resistance. If 2s find it difficult to push lower, which they should, and curve traders continue to keep the 2s/10s over 275bps...."rate sheet influential" 10s will find increased resistance at 3.55%. We would be taking profits at these yield levels and are not surprised to see others doing the same thing.

I hope my SELL INTO STRENGTH BIAS is obvious. This means float boaters should be looking to lock in anytime now. Stay Defensive....rates are overbought.