MBS OPEN: Yield Curve Crushed in Anticipation of Bernanke
Good Morning. Happy Hump Day.
Here is a quick recap of yesterday:
All that jazz was good for a few reprices for the better. Yippe Yay Hooray.
The day ahead looks to be quite interesting.
First, at 3pm eastern the USA hockey team will face the surprisingly sneaky Swiss nationals in the Quarterfinals. While we already beat the Swiss 3-1 last week, they are not to be overlooked...the Swiss took Canada to a shoot out last Thursday, that is impressive considering the Swiss don't have too many heads on NHL rosters. After that, the main event: At 7:30pm eastern Russia plays Canada. Ovechkin vs. Crosby. Best vs. 2nd Best.
If you are not an avid reader or are new to the blog, I am a hockey fan, a Washington Capitals fan to be clear. Alex Ovechkin is a Washington Capital and Sidney Crosby is a Pittsburgh Penguin. Growing up, I was taught to dislike the Penguins. Attending university in the heart of PA did nothinh but intensify the rivalry as nearly half my teammates were yinzers (Pittsburghers)...so needless to say I am not a Penguins fan and I surely do not support the whiny ways of Sid the Kid.
With that in mind, keep your head up Sid...or OVIE will get your chin just like he got Jagr's.
And then....
Ok enough play time.
The bond market benefited from all sorts of scary headline news yesterday.
- Greece isn't even going to try and raise money. READ MORE
- Consumers are not so confident about the labor market and income expectations. READ MORE
- The FDIC problem bank list is growing. The FDIC is running low on deposit insurance. WATCH MORE
- Bank Lending Falls at Epic Pace. READ MORE
- The Fed took another subtle toward an accommodative exit from the financial markets. READ MORE
I will stop there because that is enough reason for a flight to safety. Its not even necessary to discuss how many borrowers are underwater on their mortgage, or the fact that Toyota is in trouble, or that Mass Layoffs rose in January after four months of declines.
My point is....
While the overall outlook is the "worst case scenario" has likely been avoided, the recovery process will not be smooth. Bond yields and mortgage rates will benefit from the times when the market is served a reminder of just how close we came to all out systematic failure. Mortgage rates will also feel the effects of short term periods of optimism and exuberance. All this does is support the notion of a range trade. There will be good days, there will be bad....the game must still be played though. Play the range until the range plays you.
10 year Treasuries and stocks traded mostly sideways overnight. At the moment, Treasuries are testing support (prices want to fall) and stocks are poking and prodding at resistance (prices want to rise).
When looking at 10 year Treasury yields in the cash market, the 3.625% coupon bearing 10yr note is currently -0-02 at 99-12 yielding 3.699%. I have been using Fibonacci retracements as a technical guidance giver....based on the Dec. 21 bond market sell off. Looks like I am using the right study huh? Holy technical movements!
New loan supply picked up a bit as MBS prices appreciated yesterday, but nothing monumental as there just isn't all that much borrower interest in new loans, relative to H109 at least. This lack of mortgage demand was again obvious this morning as the MBA Purchase App Index hit a 13 year low. Some blame bad weather, we blame it on a lack of qualified borrowers. Remember: any ups and downs in MBA Mortgage Apps data will seem huge on paper, this is because index levels are so low. Loan originators will agree....marginal movements will look bigger on paper than they actually are in reality...we are just putting along at the trough.
As the MBS Ninja pointed out yesterday, the mortgage market will deal with a confluence of technical events next week. This has most traders defensive of progress in either direction, something that will keep mortgage rates tied to the movements of benchmark Treasuries. READ MORE ON YIELD SPREADS
Rate sheet influential MBS prices are weaker to start the session. The FN 4.0 is -0-04 at 97-23 yielding 4.218% and the FN 4.5 is -0-02 at 100-23 yielding 4.423%. The secondary market current coupon is 4.382%. The current coupon is 68.2 basis points over the 10 year TSY yield and 59.2 bps over the 10 yr swap rate.
That 100-24 pivot point has been highly trafficked recently...
Reprices for the Worse at 100-16. Reprices for the Better at 101-00
Did the title of this post scare you? The yield curve got crushed overnight (flatter), 2s/10s are now at 281 bps.
Blame 2s for this flattening as 2 year note yields are way more sensitive to changes in Federal Reserve monetary policy than 10s. This is a "just in case" defensive move ahead of Bernanke's 10am Humphrey Hawkins testimony. Any hints of a rate hike and 2s will skyrocket over 1.00% which would flatten the yield curve further but still push benchmark 10 yr yields higher and "rate sheet influential" MBS prices lower. Check out whats 2s did last night. Hard bounce higher...
NEXT EVENT: BERNANKE and NEW HOME SALES AT 10AM
That said, the market's quiet disposition this morning illustrates that most participants are waiting on this testimony. Speculative positions are set and safety has been taken just in case Bernanke offers some sort of tapebomb to the marketplace. While we are hopeful for a focus on weakness in housing and jobs, don't expect Ben to venture too far from recent rhetoric. The glass is half full, the worst case scenario has been avoided, cautious optimism, defensive exuberance, gradual exit, Fed Funds rate hikes will occur late in the recovery cycle, adjustments to interest paid on reserves will be first sign of serious exit from accommodative policy.
PS...FREDDIE MAC EARNINGS: Fourth quarter 2009 net loss was $6.5 billion. After the dividend payment of $1.3 billion to the U.S. Department of the Treasury (Treasury) on the senior preferred stock, net loss attributable to common stockholders was $7.8 billion, or $2.39 per diluted common share, for the fourth quarter of 2009.
PPS...GREECE IS STILL ON EVERYONE'S RADAR