Rates Rally in Overnight Session. Long Term Resistance Hit. Profit Taking Expected

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Good Morning. Happy Friday. The econ calendar is essentially empty and there are no major events scheduled in the day ahead. With many market participants already enjoying time by the pool, trading flows are expected to be thin and price action potentially choppy. 

Treasuries traded well early in the overnight session as stocks around the world followed U.S. equity indexes lower. Although profit taking was  noted in the long end of the curve when the European session got underway, the "bid wanted" environment did little to reverse the overbought status of benchmark yields. Rates are lower as the domestic session begins...

The 2.625% coupon bearing 10 year note is +0-07 at 100-21 yielding 2.548% (-2.1bps). This is a very important technical level. Below is the long term 10yr note yield chart we've been watching.  10s have traveled all the way down to 2.548%. This is the way bottom of the "PANIC ZONE".  The rally has run out of room from all angles...if we see 10s test lower levels I will be forced to begin preparations for the end of world as we know it.

While the market's true sentiment indicator (bond market) continues to point toward a "double-dip" scenario,  stocks seem to be hanging around waiting for a moment of clarity where uncertainty is overwhelmed by short term tactical biases and a surge in one-way directional flows leads positions back into profit taking territory. This behavior is evident via the choppy performance of S&P futures, especially in the 30 point range between 1070 and 1100.  

S&Ps are currently testing the supportive strength of that 1070 inflection point.   Violations of this pivot in the last four months can be counted on one hand, in each example the retracement lasted a very short time before opportunistic bargain buying led indications back into the confines of the 1070 to 1100 range.  This evidence implies any trips below 1070 should be short lived.

 On a relative basis,  production MBS coupons performed well for a period between 9 and 12pm thanks to a slowdown in loan supply sales and "buying at the wides" from fast and real money accounts. Unfortunately production MBS coupons fell behind later in the day after stocks tanked and the FTQ bid poured back into TSYs. MBS lost their bid sometime in the early afternoon hours. Nonetheless the flattening yield curve helped rate sheet influential MBS prices move higher yesterday, allowing most lenders to reprice for the better, erasing two days of rebate reductions that had many a loan officer panicking about a loss of income.

3.5 MBS coupons are still illiquid as real money has yet to dabble outright in the phantom coupon and speculative traders continue to trade the basis via CMM. Unless long term 2.548% resistance is broken in 10s and 3.5s trade over 101-00, we won't be seeing mortgage rates move below 4.25% on a broad based scale.

The October FNCL 4.0 is currently +0-01 at 102-18. 4.0s are +106bps off the 10yr note, wider to start the day. I expect to see profit taking in TSYs and a move higher, with that in mind we should see the FNCL 4.0 move back into the 102-12 to 102-02 range.

OVERNIGHT NEWS RECAP

  • Japan PM and BOJ Chief To meet Monday 23rd-Nikkei News.
  • Japan Govt Spokesperson does not know when PM-BOJ will meet.
  • Japan Econmin Arai, Yen rise posing downside risk to economy-Rts
  • Japan Nikkei closes day down 2.0% and Week Down 0.8%.
  • Australia prepares to go to the polls tomorrow-Close call, polls even.
  • ECB Weber advocates unlimited liquidity to banks through the turn-Rts
  • ECB Weber Infl. risks to be low over medium term-Rts
  • France Sarkozy to hold urgent talks on budget and growth-Rts
  • Swiss No US tax issues for Swiss banks-Swiss Tax Envoy-Rts
  • S.Africa auto makers say deal reached with strikers-Rts
  • Forex EUR/JPY falls to seven week lows under 109.00.