Treasury Auctions Total $82 Billion Next Week. Mortgages Wider and Wider....
The Treasury Department has announced the terms of next week's auction cycle. Here are the details and the schedule:
Monday April 5: $8 billion 10 year Inflation-indexed notes aka TIPS (reopening)
Tuesday April 6: $40 billion 3 year notes. Unchanged from the previous auction.
Wednesday April 7: $21 billion 10 yr notes (reopening). Unchanged from the previous auction.
Thursday April 8: $13 billion 30 year bonds (reopening). Unchanged from previous auction
In total, $82 billion in notes and bonds will be sold. This will raise about $41 billion in new spending money for the Treasury ($41 billion in coupon debt held by the public matures on April 15).
Generally this would push the 2s/10s yield curve steeper, however given the recent mixed signals being sent from curve traders. While the "steepener" bias is clearly in control, I am not yet able to make an accurate assumption on how the market will be building in a supply concession to cheapen up next week's issuance. Basically, it's all about the Employment Situation Report tomorrow. Once that event is behind us we can start trying to figure out how the shape of the yield curve will affect overall yield levels (rates as opposed to curve spreads) and the "cheapness" of next week's round of supply.
Plain and Simple: we don't know if new debt supply has been priced in yet. After the Employment Situation Report, quarter end, and religious holidays are fully behind us, we will have a better idea of where rates are headed.
The 3.625% coupon bearing benchmark 10yr note is -0-08 at 98-01 yielding 3.867%. 10s made a pass at the 3.88% pivot point we targeted this morning, which held. If TSYs are to give MBS any directional support today, 10s must make their back into the 3.57 to 3.85% range. First things first, lets watch for a break of 3.86%. Don't expect too much movement outside the parameters of the recent range though...it's just about time to put the P&L into "wait and see" mode.
In the interest rate futures market, the 10yr contract is still feeling the support of yesterday's high volume price levels. We want TY to move over 116-04. We do not want TY falling below 115-28. Anything in between says : THE MARKET IS WAITING FOR NON FARM PAYROLLS DATA!!!!
Mortgages continue to feel the pain of the Fed's exit. Selling is broad based with "rate sheet influential" coupons taking the worst beating. If this continues we may see a bit of a snowball effect as servicers will be forced to reduce their holdings of longer life loans (duration shedding/convexity). This would pressure MBS yield spreads even wider and push prices even lower. On the up side it might also signal the end of the first stage of the "NO MORE FED" cleansing processing. If that does happen we should expect to see banks doing a little bargain buying. Searching for risk/reward yield spread status quo!
The FN 4.5 is currently -0-10 at 99-27 yielding 4.526%. The secondary market current coupon is 4.536%. The MBS current coupon yield spread is 66.6 basis points over the 10 yr TSY yield and 66.3 basis points over the 10 yr swap rate. MBS current coupon yield spreads continue to widen out against benchmarks...this is a result of the Fed's exit. (10yr swap spread not negative vs. TSYs anymore though!!!)
While MBS relative value continues to cheapen, MBS prices are off their low prints of the day. I suppose that is a small concession. Not really though....
HOW MANY LOANS ARE YOU FLOATING?
HOW LONG DO YOU HAVE TO RECOVER LOST BPS?