MBS Hit Reset Button as Related Markets Search for Short Term Direction
- SEPT FNCL 4.0: -11 at 101-18 (101.563) SEPT FNCL 4.5: -08 at 101-05 (101.156)
- Secondary Market Current Coupon: +4.5 bps at 3.792%. 3m/10y vol: -0.9bps at 92.5
- CC Yield Spreads:+82.9bps/10yTSY. +80bps/10yIRS. SPREADS
CLOSED WIDER BUT OFF WIDES OF DAY
- UST10YR: +3.6bps at 2.963%. 2s/10s: 3bps STEEPER at
232bps. WORST PERFORMER: LONG BOND +4.4bps to 3.983%
- S&P CLOSE: +0.60% at 1071.25 HIGH: 1074.72 LOW: 1061.08 BEST SECTOR: Utilities +1.48%
After spending most of the previous week in our own little insulated world, "rate sheet influential" MBS hit the reset button today. Price levels moved lower and yield spreads ticked wider as profit takers rang the register and lock desks attempted to sell forward loan supply to a "bid wanted" marketplace. Buyside demand was underwhelming...
As you can see in the chart below, the September delivery FNCL 4.0 slowly leaked into lower levels as the day came to a close.
Investing sentiment as measured by stock markets appeared to improve last week, however, after rallying eight of the previous nine sessions, positive progress stalled on Friday as traders rejected 1,100 just as aggressively as they rejected 1,000 two weeks before....
I wouldn't be at all surprised to see the S&P retest lower levels before short covering led the index higher again. 1060 is the next major pivot, after that 1050, and 1040. If the S&P found a firm base this afternoon to build upon on tomorrow, 1,100 isn't far off in the distance, and we learned last week that a retest of 1,100 could lead 10s all the back up to 3.12% .
If one were to gauge the sentiment of the markets based on demand for U.S. Treasuries, the less than optimistic outlook is still obvious: the "Flight to Safety" is alive and well. Once auction supply was totally absorbed last Wednesday afternoon, the yield curve rallied into the weekend, erasing a sell off that had pushed the 10 year note yield nearly 20bps higher than it's recent range lows. The 2-year note yield hit a record low!
On the surface, the environment is still ripe with doom and gloom. Talking heads are discussing the underlying strength of mixed earnings releases out of the financial sector, headlines are focused on contracting consumer confidence and a slowing economic expansion, plus no one knows how the passage of financial reform will really affect specific industries.
This BIG PICTURE uncertainty favors floating interest rates on a 45 day timeline, but you better be ready to deal with added amounts of chopatility. The day to day movements of this market are still driven by dealers and professional profit takers, not a herd of retail investors on Main Street. This implies we should continue to expect stocks to bounce around a wide price range, something that could prove detrimental to short-term rate floats if risk goes on special and equities go on a run.
Plain and Simple: Uncertainty is the only certainty and short-term tactical (non-committal) biases determine directionality. It's still a trader's world and we're still living in it! Be ready for chopatility.