MBS MORNING: Fed President Reminds About Labor Market Weakness

I am kinda bummed no one laughed at my Kathy Ireland reference in MBS OPEN.

Her dress was so tight you could see her liver processing the booze (that's a rumor). I suppose I could have poked fun at Sarah Jessica Parker's "Queen of the Nile" get-up. Ugh. You guys are killing me. Is this one of those "you had to be there" jokes? I know I am setting myself up to be mocked because I watched the Oscars...but come on, there is humor in everything we do. (Like I said, I lost control of the remote. Other men: don't pretend you didn't watch. You know what I am talking about here!)

Ok I am done pretending I am Perez Hilton. HAHA back to the markets.

Chicago Fed President Charles Evans, a middle of the road on inflation non-FOMC voter, shared prepared remarks with the world this morning. I didn't hear much that could be considered "news worthy". The one thing I might call attention to were his sentiments surrounding the jobs market. He basically said the Fed has realigned their "status quo" employment levels...meaning the Board will be more accepting of higher levels of unemployment in the future.

This falls in-line with our feeling that many of the jobs that were lost over the past two years HAVE BEEN LOST FOREVER thanks to record levels of productivity and new investments in technology. Again...if you are underemployed or straight up our of work...go back to school and learn learn learn. You must keep up with technology or your job opportunities will dwindle rapidly. 

Here are a few comments Reuters found useful. Notice Evans says"extended period" means the FOMC will start to consider hiking the Fed Funds rate 3-4 meetings after they remove the verbiage from the FOMC statement. I suppose the speech made by Brian Sack yesterday needs more attention. MND Newswire post? 

A modest flight to quality combined with short covering and an overseas real money bid pushed 10s back down to the 3.68% support. (Remember, real money buyers (banks, insurance companies, pension funds) are the "bargain buyers" of the rates market). Since then we have battled the STOCK LEVER and a general willingness to let rates rise before the auction results are released at 1pm. 10s bounced off of the 50% retracement level are are approaching 3.71% mid-range pivot.

Check out the stock lever. The chart below compares the 10yr TSY futures contract (price) to the S&P futures contract (price). Stocks up. Rates prices down.

Now of course this happens to be occurring as the Treasury is auctioning $40 billion 3 year notes. I am not saying the market is hating on 3 year notes specifically...more or less traders are allowing yields of all kinds to tick higher just because they can.  This is the fifth consecutive 3yr note auction at $40 billion and therefore nothing new in terms of size of issuance. I can also tie a "take what youre given" bias to price action because volume is below average, especially for an auction day, so it would appear that primary dealers are sitting back letting short positions push yields higher. All in all I would say this sets up the auction to go off just fine as this maturity is generally favored by ferners (foreigners) aka indirect bidders. Whether or not the long end of the yield curve (rate sheet influential notes) does well is dependent on: HOW WILL THE 10 YR AND 30 YR AUCTION GO TOMORROW?

Based on the steeper shape of the yield curve over the past two days....I am nervous for rates over the next two days.

With that in mind....if the "disdain for duration" bias extends after the 3 yr note auction...here is my reprice for the worse target:101-04. We're already half way there...

AUCTION RESULTS TO BE RELEASED AT 1PM.

If the post-auction reaction is originator unfriendly I will post an ALERT. If status quo is maintained...I will take a little more time to communicate results. Check my comments on this post for a quick update.