Overbought Bonds Give Back Extra Gains as Risk Rallies. MBS at Session Lows
Equity markets are rallying and benchmark interest rates are retracing gains that forced the long end of the curve even deeper into overbought status yesterday.
The risk trade is on but participation is meager at most. S&P futures are up 17 handles, through 1090 resistance at 1094. The range is clearly still in play...1070 to 1080 has been a clear pivot since mid-May.
After getting violently crushed (flattened) to the tune of nearly 30 bps over the last seven sessions, the long end of the curve is steepening today The 2s/10s curve is 5bps steeper at 212bps wide, led by a 6.4 rise in the 10yr note. Vols are once again catching a bid indicating the market is becoming a bit more sensitive to sell offs and looking for protection.
Volume isn't impressive and money really isn't leaving the bond market in any size, more or less there are a lack of willing buyers out there at the moment (while risk catches a bid). The market got way long the long end of the yield curve after the Fed Announced QE LITE, that implies we should see "buying on the dips" at some point to protect those positions. HERE is the ticket for the Fed's first round of TSY buying. Was the street caught off guard by the Fed's TSY coupon purchases?
The 2-year note is 1.6bps higher at 0.512% and the 2.625% coupon bearing 10-year Treasury note is 5.9bps higher at 2.632%. That blue range we outlined a few weeks ago has provided strong directional guidance. The bottom blue line = 2.54%. The top blue line = 2.75%.
"Rate sheet influential" MBS are following longer dated benchmark debt prices lower. In terms of yield spreads, the on-again off again "up in coupon" trade continues to get smashed as vols richen and traders keep negative convexity and the preliminary findings of the housing conference on their radar (no rapid refi program!). Around the current coupon side of the stack, "buying at the wides" from fast money accounts has slowed the pace of current coupon spread widening but longer dated debt is off limits in general (for now). New production loan supply has barely broken the $1bn mark. Yawn.
READ MORE ABOUT THE SECONDARY MARKET CURRENT COUPON
The October Delivery FNCL 4.0 is -08 at 102-08. The October Delivery FNCL 4.5 is -06 at 104-01. The secondary market current coupon, as measured by me, is 3.2bps higher at 3.629%. Again if you are keeping track of the CC at home, I weight the 4.0 coupon heavily. Here are my CC spreads vs. the curve: +103/10yrTSYs and +103/10yr IRS. Two weeks ago we were in the +70/10s range. Gappy...
MBS are just off their session lows...
Loan pricing is worse at 5 out of the 6 major lenders but who are we kidding, rebate is ridiculous either way. 4.25% is "BestEx" for a well-qualified borrower (no LLPAs). 4.00% is paying but even a perfect borrower will have to pony up at least 1.5 points for that quote.
Plain and Simple: the modest rise in rates we are seeing today can be viewed as a short-term play, but don't get too comfy. Stay defensive and be nimble with your locks just in case the long end of the yield curve loses its luster (duration shedding).