MBS OPEN: Short Covering Helps Bonds Extend Positive Progress
The holiday shortened work week was not so friendly to mortgage originator float positions. Lower MBS prices, wider yield spreads, reprices for the worse, and higher mortgage rates summarize the week that was from a loan originator's perspective.
The 3.625% coupon bearing 10 year Treasury note ended the day on Friday +0-08 at 98-24 yielding 3.76%. This extended the recent trend channel higher. 10s have now progressed outside the confines of 3.57% to 3.71% range support, market participants are now testing 3.80% with an eye on 3.85%. The 2s/10s yield curve was 2 basis points flatter at 286bps, well off the 294bp high that was hit prior to the Fed Discount Rate hike.
The FN 4.0 went out the door +0-00 at 97-01 yielding 4.282% while the FN 4.5 was +0-01 at 100-07 yielding 4.481%. The secondary market current coupon was 4.471%. The current coupon yield ended the week +71.1 basis point higher than the 10 yr TSY note and 59.1 basis points over the 10 year swap rate.
In price terms, the FN 4.5 is now attempting to recover much lost progress. PARNERTIA, which hasnt been discussed too seriously since October, is now back on the map of rate sheet makers. Unfortunately, while history tells us this visit to lower price territory should be brief....previous price history is just that...history. The road ahead, while clearly not CLEAR, still favors continued positive economic progress...slowly erasing anxiety that the "worst case scenario" might be retested...hurting chances for a move back to the rates of 2009.
While a warmer than expected PPI print, a few better than anticipated manufacturing surveys, a rate hike scare, and subtle hints of continued stabilization in housing (not really in our opinion) were offered as further proof of a slow and steady recovery and thus justification for higher yields, we know the economic landscape is still muddled with uncertainty, leaving traders to focus tactics on supply and demand in the "here and now" ...specifically $118 billion in Treasury coupon supply, which will be auctioned this week. It's still a trader's world, and we're still living in it.
We are however willing to put a tiny asterisk next to last week's bear steepening bond market sell off as mainland China was out all week and trading conditions were thin. The lack of liquidity in down trades allowed for periods of snowball selling (forced) as there was less of a real money "bargain buyer" bid under the marketplace. Looking ahead, with all hands now back on deck, we are on the watch for an opportunity to hop on board a short covering induced, "buying at the lows" fueled rates recovery bounce (later in the week). Of course this is speculative (wishful) thinking and reality reminds us that any correction is not likely to develop into a long term, originator friendly trend.
The week ahead is busy. Ben Bernanke's semi-annual report to Congress dominates discussion while housing data is abundant and another read on 4Q GDP is due. On top, as indicated a few times already, Treasury will offer $8 billion 30 year TIPS today (real money want it?) followed by $118 billion in 2s, 5s, and 7s on Tuesday, Wednesday, and Thursday respectively.
Regarding Bernanke, expect a moderately optimistic, but cautious tone this week. The Fed will continue to back out of the banking system as the market allows. This calls attention to the "WORST CASE HAS BEEN AVOIDED, now its time to move forward" perspective and highlights why we think benchmark yields and mortgage rates are headed higher but not too high. (Cautiously optimistic)
Besides these headline grabbing scheduled events, the fate of Greece is still up in the air and possibly in need of attention. This leaves currency valuations a hot topic of debate and creates an opportunity for more speculative strategy in the interest rates market. The dollar has gained much ground against the Euro in Q1 2010, thanks to sovereign debt fears in the EU. In 2009, the weak dollar trade helped add momentum to stock rallies. As we appear to be leading the world out of this crisis, demand for US$ will rise. This makes owning US$ denominated assets more attractive but also takes away from the flight to safety bid in TSYs. The Euro has lost much traction against the dollar in 2010.
Plain and Simple: Its a super busy week. While we see bargain buyers as a possible source of support for rising rates, we do not anticipate this will develop into a trend. We look to lock up floaters if lenders provide any incentive. SELL INTO STRENGTH
The FN 4.0 is +0-02 at 97-03 yielding 4.276% and the FN 4.5 is +0-02 at 100-09 yielding 4.496%. The secondary market current coupon is 4.485%. The CC yield is +69.7 over the 10 year TSY yield and +60.1 over the 10 year swap rate. This is tighter from 5pm "going out" marks.
The FN 4.5 is trying to extend the late Friday price bounce.
This morning's trade can be characterized by light participation and short covering in TSYs. While this has helped MBS prices bounce a few ticks, it is not indicative of further price improvements to come. This rally is shallow. Nothing really too news worthy hits wires today...watch for CHOPATILITY in all markets.
NEXT EVENT: $8 billion 30 year TIPS at 1PM.