Rates Retrace Recent Gains But Find Support at Key Technical Level

Good Morning. Happy Friday.

Lacie, my 10-year old boxer, is still pretty groggy after having surgery to remove a cancerous tumor yesterday, but still "with it" enough to express her anger for being put through such a traumatic ordeal. I assume both her and our 8-month old puppy believe the humans are conspiring against them. 

The 10 year TSY contract ticked sideways in average overnight trading volume...then N.Y. rolled out of bed at 8AM and action picked up.  Check out the size that came into the market between 8AM and 9AM. There is a sell ticket dumping 12,761 contracts in there...

In the end, seller flows gained control and prices fell. While we did see a few minutes of increased trading activity, volume is still pretty apathetic so don't let this early session retracement scare you. More or less, because market participants are operating in a defensive manner, they are quite willing to let offer prices slide until other accounts decide to cover their short position or do some bargain buying. In the absence of market moving data, there is little motivation to catch the falling knife...making it much easier to watch the market cheapen or let short positions get deeper in the money.

In the cash market, the 3.625% coupon bearing 10 year TSY note is -0-08 at 97-19 yielding 3.924%. 10s are testing the conviction of the recent recovery rally. The perspective provided above is still applicable. I would really like to see some real money bargain buyers enter the market at this important technical support level though. BID WANTED!  Don't cross that line UST10YR!!! If 10s do bounce here...expect a move back down to 3.85% in the next few days. If today's move has some muscle behind it, another test of 4.00% is possible.

O.K time to put on your spread product hat, lets talk about the mortgage market. TODAY IS NOTIFICATION DAY FOR 30 YEAR FANNIE AND FREDDIE TBA MBS COUPONS. This means prices will appear to drop later this afternoon, they aren't really falling though. READ MORE. FEED YOUR BRAIN!!!

Volume is light to start the session but  "rate sheet influential" MBS valuations are loving cheaper dollar prices (negative convexity relief). Even with no official backstop bid to protect us from supply and demand dislocations, production coupon mortgages are near their richest levels EVER. That's because there hasn't really been any supply to absorb! STAGE 1 COMPLETE: READ MORE

The FN 4.5 is -0-3 at 99-28 yielding 4.522%. The secondary market current coupon is 4.521%. The current coupon yield is 59.7 basis points over the 10yr TSY note yield and 61.6bps over the fixed side of the 10yr interest rate swap.

This modest retracement is not out of the ordinary and definitely not unwelcome by MBS valuations. I hope I was able to provide enough justification to keep you from panicking. We still support the notion that 10s will re-enter the 3.57 to 3.85% range. What new economic developments have we seen to warrant a move above 4.00%???? Inflation is not an issue...this makes a 4.00% 10yr yield look like a darn good deal! PLUS BENNY B SAYS WE ARE FAR FROM BEING OUT OF THE WOODS. READ MORE!

I am watching the FCIC Hearing on CSPAN2. NOT!!!! (Borat voice). I am watching the Masters like many other market participants..