MBS MORNING: The Bond Market Has Been Here Before...

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Lets do a quick scoreboard check: The dollar is stronger, both gold and oil are getting pounded, stocks are deeeep in the red, and the bond market likes it all.

Short covering plus corporate debt pricings plus a flight to quality asset reallocation have brought Treasury yields back from the brink of a range breakdown. Hello stock lever....

Stocks are definitely taking one on the chin today (so is gold and oil). Take a look at sector performance:

The immediate effects are obvious in 10s. Currently the 3.375 coupon bearing 10 year TSY note is +0-20 at 97-29 yielding 3.627%. Thats a long way from 3.707%...where we ended the session yesterday. The term "range bound" is starting to bore me. I haven't made up a phrase in a while....instead of "range bound" how about "fenced in" or "bange round". (You ever try that with your name? Switch the first letter of your last name with the first letter of your first name. Example: Qdam Auinones. Ok. Not a good example. These are better: Brew Drees. Bom Trady. Olex Avechkin. Gatt Mraham. Try it. Its funny)

Anyway, we thought this week would get choppy. Its been choppy. Next time we say NFP is an influential release, think back on this week as the benchmark for econ "influentialfulness".

I posted the chart below late last week because it looks cool on a Blackberry (im jealous of the iPhone). Since it was a Friday afternoon on the last day of the month, I found it unlikely that many originators were parked in front of their computer.  Well maybe not...are you forced to be at your desk from 9-5? How many of you (loan originators that is) are still free to roam the streets and come and go as you please?

Here is that same chart again...holy "bange round". 10s are bouncing back and forth between retracements, moving averages are converging, and the market doesn't know if 10s are overbought or oversold. Seems like we are heading towards some sort of high "econ influentialness" event. (hint: NFP!)

And now for an aesthetically pleasing MBS chart. The FN 4.0 is +0-15 at 98-09 yielding 4.169% and the FN 4.5 is +0-13 at 101-07 yielding 4.378%. The secondary market current coupon is 4.336%. The CC yield is +71.7bps over the 10yr TSY note yield and +60.7 bps over the 10yr swap rate.

NOW FOR THE HEADLINE: The FN 4.5 is trading at a 2010 price high.

HEY!!! LOOK AT THAT...the FN 4.5 is back to Dec.21 prices. Remember this chart from the MBS OPEN???? 10s bounced this morning at support created on Dec 21 2009. Status Quo is being restored ahead of NFP.....

 

What a day, what a day. Sovereign risk fears abroad and labor market uncertainty domestically are being cited as the source of negative directionality in stocks.

If NFP is positive tomorrow, all this progress will be unwound in an instant. Even then, barring a horribly RED NFP print, we have been here before, we have seen stocks take one on the chin only to get up off the matt a few days later. What's different about this go-round? Nothing, not  yet at least....one of two things is happening:

  1. the stock freight train is slowing down for a breather (consolidation) before moving toward a test of 1200
  2. the stock freight train is about to run out of track and fall back below 1000

I have seen stocks shrug off job losses time and time again. While my economic outlook is supportive of stagnation and sideway price action, I am not getting burned by this again just because the media is freaking out (AGAIN) about Greece and Spain and whoever else is expected to default. Doesn't it seem like negativity is abundant today???? This time I am assuming nothing. This time I am waiting for PROOF before calling a rally top in equties.

WHAT ABOUT RATES?

We've been here before! We've seen bond bearish NFP prints, we've seen tons of "better than expected" data, we've watched stocks rally on and on and on and on. Yeh...and the whole time rates went on about their business, minding the limits of their "fenced in" perimeter.  RANGE BOUND.

I suppose there is a new dynamic in the current environment: the range has moved higher...from 3.27-3.50 to 3.57-3.85. I am not feeling so hopeful for a return to the days of 3.36 pivots and 3.42 support. It looks like those days are behind us. We are now battling whether or not to hold steady inside the 3.57-3.68 fence or to head higher into the 3.71-3.85 range.  The 3.71 to 3.85 range will bring about higher mortgage rates. The 3.57-3.68 range leaves mortgage rates right about where they sit at the moment. (Which really doesn't matter all that much in the housing demand function. Rates are already low. We need jobs to boost the housing market)

Does anyone else think stocks are just gearing up for a big old bargain buying rally?

Looking forward, watch for profit taking to pick up as 10s test 3.62%. I wouldn't say there is a risk of reprices for the worse, but I doubt we see reprices for the better. Unless 10s break 3.62% and move lower....