MBS MORNING: Benchmarks Searching for Status Quo Levels

Price action has been pretty choppy in the MBS market today. The FN 4.5 has broken yesterday's low price print. While these losses are still contained within the range, a move below  100-24 would warrant a reprice for the worse.

 The FN 4.0 is currently -0-05 at 98-02 yielding 4.186% and the FN 4.5 is -0-06 at 100-28 yielding 4.405%. The secondary market current coupon is 4.339%. The CC yield is 70.8 bps over the 10 yr TSY note and 64.1bps over the 10yr swap. Yield spreads are slightly wider on the day.

The 10yr TSY note has taken out yesterday's high yield. The pattern formed in the chart below goes back to the most recent MBS WEEKLY post where we discussed ascending triangles.  What is expected to happen is called a continuation or a breakout to the upside. If we were studying prices this formation would be bullish, however since we are looking at yield, it is considered bearish as it implies higher yields ahead.

Kansas City Fed President Thomas Hoenig reaffirmed his hawkish interest rate bias this morning, stating ZIRP invites risky financial behavior and often times leads to problems down the road. Remember Hoenig was the only member of the Board to vote against keeping the Fed Funds Rate between 0 and 0.25% at the last FOMC meeting. READ MORE

I say thank you for your concern Mr.Hoenig but shouldn't we still be worried about the economy as a whole and it's reliance on accommodative policy as a confidence crutch? While a Fed Funds rate hike would not necessarily have substantial effects on money market liquidity ---because there are still over $1 trillion excess reserves in the banking system---the indirect effects on sentiment might be enough to throw a wrench in the recovery process. I'm more concerned about the entire market's general sentiment than the quantitative impact. Banks are not using their excess reserves to create new money, until they do so, raising the Fed Funds rate doesn't seem prudent.

The 2s/10s yield curve is 2 basis points steeper at 282bps....so the rates market pretty much ignored Hoenig's statement. This is a function of technical trading strategies as the 2s10s curve has hit a key pivot point. This implies the market is flipping its yield curve strategy from a FLATTENER to a STEEPENER. This has bad implications for "rate sheet influential" MBS prices.

While I do see reasons to be worried about reprices for the worse in the short term, recent ranges are still containing directionality. It looks like the market is restoring status quo ahead of what is expected to be a busy end to the week.  Status quo in 10s is 3.64%. If MBS yield spreads hold steady, the FN 4.5 should bounce around the 100-28 pivot point for the rest of the day which would reduce the threat of reprices for the worse. Wait and see...