Treasury Yields Lower After Retail Sales. MBS Lag as Negative Convexity Grips Valuations
Good Morning.
The Census Department has released Advanced Monthly Sales for Retail and Food Services for April 2010
From the Release...
Advance estimates of U.S. retail and food services sales for April, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $366.4 billion, an increase of 0.4 percent from the previous month and 8.8 percent above April 2009.
Total sales for the February through April 2010 period were up 7.3 percent from the same period a year ago. The February to March 2010 percent change was revised from +1.9 percent to +2.1 percent.
Retail trade sales were up 0.5 percent from March 2010 and 9.6 percent (±0.7%) above last year.
Here is a breakdown of individual categories.....
Plain and Simple: Retail Sales were up 0.4% in April, this beat the Reuters survey consensus estimate of +0.2% but was sharply lower than the previous print of +1.9%. Excluding autos, retail sales were +0.4%, this matched expectations but was below the March read of +1.2%.
Stocks initially traded back to the session lows but have bounced back up to the 1150 pivot...which is not far above the session lows!
Yield levels across the curve ticked lower but the shape of the 2s/10s curve remains unchanged at 269bps. The 10 year note is looking to once again test the Dec.21, 2009 sell-off retracement. The 3.625% coupon bearing 10 year TSY note is +0-15 at 100-05 yielding 3.481%, 5.6bps lower on the day.
Implied volatility is higher into the rally, indicating traders who are "playing the range" are soon to be profit takers. A rise in open interest combined with higher prices levels and an uptick in volume is however indicative of new position adding or possibly forced buying. Either way a layer of "position support" is in place.
"Rate sheet influential" MBS coupon prices are being pulled higher by benchmarks but are lagging as negative convexity grips valuations. Real money accounts are generally buyers on price dips and sellers as levels tick into richer territory. However there is the money manager/fast money bid waiting in the wings to take advantage of wider yield spreads.
The FN 4.5 is currently +0-05 at 101-12 yielding 4.344%. The secondary market current coupon is 2.8 basis points lower at 4.275%. The CC yield is +79.2 basis points over the 10yr TSY note yield and +75 basis point above the 10yr interest rate swap.
It is interesting that 10s traded lower as stocks failed to muster momentum after the better than expected Retail Sales print. It is however hard to overlook the fact that the Euro is trading at its weakest level vs. the USD seen since March 2009. I am more inclined to relate this price action to the continued shift in currency valuations and its general effect on the sentiment of the marketplace. The run to move cash reserves toward risk-averse dollar denominated assets continues...of course I should remind that day trading tactics are playing a role in interest rate movements.
For now I look for 10s to run into resistance at 3.472% unless the S&P is unable to break back into the 1150 to 1173 range. Lenders should give back a few extra bps to originators today. We should see some originator supply at these MBS prices though...
NEXT EVENT: INDUSTRIAL OUTPUT FOLLOWED BY CONSUMER SENTIMENT
WHAT IS NEGATIVE CONVEXITY?
Simply put- a callable bond's predisposition is to lose more in price (net) on the way down (sell off) than it gains on the way up (rally). This a reflection of the prepayment or callable risk embedded in the valuation of mortgage-backeds