MBS MORNING: Gains Trimmed After Consumer Confidence Data

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Since opening at the best levels seen since early December, the rates market has lost all progress and is now trading close to where we went out yesterday afternoon. Besides being weighed down by the $44 billion 2 year note auction, the stock lever has also exerted pressure on interest rates.

In the chart below you can see how the stock lever has affected the bond market today. Rates selling picked up momentum after a better than expected Consumer Confidence print (55.9 vs. 53.5) added a bid to equities. Trading volume does remain relatively light in both stocks and "rate sheet influential" benchmarks so I wouldn't call this an unwinding of "FLIGHT TO SAFETY" positions in TSYs as much as it is short term positioning and profit taking strategy. Don't get it twisted though...we are still selling into strength. This means you should be looking to lock in floaters over the next few days..... 

 In the chart below I isolated the 10yr note to show you how the 3.62 pivot point continues to moderate progress in both directions. Once 3.68 is broken "in size", meaning in high volume, we will be issuing strong lock recommendations.

The 3.375% coupon bearing 10yr Treasury note is trading +0-01 at 97-30 yielding 3.625%. In the futures market, TY has seen 530K trades. (TY = 10yr futures contract)

The same story applies in the TBA MBS market. Trading flows are thin and prices are hovering around key pivot points. While we are defensive of gains we also recognize limited participation in the marketplace. Basically traders are in "wait and see" mode until after the FOMC meeting. (Or if the 2yr note auction does not go well).

The FN 4.0 is +0-02 at 97-26 yielding 4.209%. The FN 4.5 is +0-02 at 100-28 yielding 4.415%. The secondary market current coupon is 4.384%, 2bp higher on the day. The current coupon yield is 76bps over the 10yr TSY note yield and 64bps over the 10yr swap rate.

The Treasury will announce auction results on $44 billion 2s at 1pm. I am not going to dive deep into analysis on this one, I think the outlook is fairly simple. While recent auctions of all maturities have seen increased participation from direct bidders (which we are skeptical of), relative to other issues, the 2 yr note has seen the strongest demand from direct bidders. This will likely continue as economic outlooks remain incredibly unclear. If I had to choose I would not be a big participant in this auction. In fact if I had to choose which maturity to sell first...it would be the RICH  2yr note. In the chart below you can see just how far 2s have come since late December. Yields have fallen 39bps from the highs!!!

This issuance is RICH ...I am not a buyer. If I had to look deeper into the outlook I would say that direct bidders must show up or we could see some poor results and reprices for the worse as dealers distribute the debt. That's my gut feeling but I am also pretty hungry so it could be that too...