MBS OPEN: Speculative Signs of Reversal in Benchmarks
Good Morning. A nationwide strike has essentially shut down Greece.
"Thursday's strike — the second in a week — brought the country to a virtual standstill, grounding all flights and bringing public transport to a halt. State hospitals were left with emergency staff only and all news broadcasts were suspended as workers walked off the job for 24 hours to protest spending cuts and tax hikes designed to tackle the country's debt crisis"
Seems like a good way to cut the deficit doesn't it? (note sarcasm)
Jobless Claims data has been released. The market was expecting 460,000 new claims and 4.49m continued claims.
The Labor Department reported initial jobless claims fell to 462,000 in the week ending 3/6/2010. This is 6,000 less than the previous week's read of 468,000. Continued claims rose 37,000 to 4.558 million vs. the previous print of 4.521 million. Worse than expected. Extended benefits ---aka emergency benefits---fell by 174,830 to 5.69 million. The four week average, which strips out some of the snow storm variance, rose to 475,500 from 470,500. Smoothing out the data illustrates a steady rise in claims since the Christmas hiring season came to an end.
California reported the most new claims with an increase of 16,112 followed by New York, which added 12,263 more claims. Pennsylvania saw the biggest decline in new claims with a 4,772 decline. Massachusetts wasn't far behind with a drop of 4,504.
Here is a recap:
At the same time the Commerce Department released Trade Balance data. The US Trade Deficit in January 2010 was $37.29 billion vs. the December deficit of $39.9 billion. Exports fell 0.3% vs. a 3.4% rise in December. Imports fell 1.7% vs. a 4.9% increase in December, the largest decline since February 2009. The price of oil imports spiked 0.9% to $73.89 per barrel in January...this is the most expensive oil imports have been since October 2008.
The initial knee jerk reaction in the rates market was a move lower in yield. Not much positive progress was made before yields bounced higher though. Looks like that position resistance I talked about YESTERDAY is still slowing any rebound rally momentum ahead of the last auction of the week. Notice 10s ticked progressively higher overnight, eventually taking out the high yield print from yesterday.
A similar move was made in FN 4.5s. "Rate sheet influential" MBS prices rebounded only to fail a test of yesterday's highs. The FN 4.5 is currently -0-01 at 100-30 yielding 4.398%. The secondary market current coupon is 4.34%. The CC yield is 60.7 bps over the 10yr TSY yield and 57.8bps over the 10yr swap rate. 3m/10yr implied volatility is holding near recent lows....prepay speed models are loving it.
In a speculative manner, it appears rates traders are looking for an opportunity to push TSY prices higher (yields lower) as the long end of the yield curve has quickly approached the outer limits of it's 2010 range. You know the saying: PLAY THE RANGE UNTIL THE RANGE PLAYS YOU. Supporting this speculative strategy is a flatter 2s10s curve...a sign that this week's "take what you are given" auction concession sell off may be losing steam. If demand is firm at the long bond auction I will watching and waiting for rebound rally opportunities.
Flatter 2s/10s curve:
There really isnt much reason to get overly excited about this originator friendly speculative theory though. Just as MBS yield spreads don't have much room to tighten further, there isnt much margin for extra bps from secondary. Lenders have repeatedly demonstrated an unwillingness to break the 4.75 mark on rate sheets. On the flip side, there is still room for 10 yr yields to make a move higher before running into firmer support.
Plain and Simple: while I do see reason to believe benchmark yields may move lower after long bond supply is taken down, I do not see lenders getting anymore aggressive than they already are. The best you can hope for is a few extra bps here and there...which I know can add up. :-D
The Day Ahead post points out other possible market moving events on the calendar today. Patrick discusses rising Chinese inflation. READ MORE
Even though it won't be a major market mover, I want to call attention to a 2pm the House Financial Services Committee hearing on FHA Reform. Assistant HUD Secretary David Stevens is expected to discuss down payment requirements.