MBS Bid Wanted After Lock Desks Add Pipeline Coverage. Range Support Fading into FOMC

Rate sheet influential MBS coupons are lower and wider in a "bid wanted" trading environment.  This suggest demand for production MBS is still M.I.A after secondary managers added pipeline coverage (hedging/selling forward MBS) last week in anticipation of a move higher in rates. Also hurting our cause is a lack of an overseas bid from the Japanese, who are  sitting this one out to celebrate "Respect for the Aged Day".

The November FNCL 4.0 is currently -0-02 at 101-28. In my model, the production MBS coupon is 3.708%. Yield spreads are wider: +97.8bps/10yTSY. +96.3bps/10yIRS, +227bps/5yTSY. 

We have ventured outside the confines of our range....

Benchmark 10yr yields have been trending higher. Currently we are seeing some energy storage/consolidation, which is expected to be released in a volatile manner in the near future.   My Fibonacci Fan continues to keep 10s from dipping deeper into the PANIC ZONE (range between  2.745% and 2.547%). Notice higher yield highs and lower yield lows.  Technicals are turning more bearish in the rates market.

Volume is weak across the curve. This is not a surprise given the pending FOMC policy announcement and increased number of "out of office" from overseas investors

The range is in danger of losing its corrective powers and technicals are shifting toward the bears.  Continued rates selling would likely lead to more selling as lock desks scramble to add more pipeline coverage (sell forward MBS) before prices fall further.

WE REMAIN ON HIGH ALERT

BREAKING NEWS:

September 20, 2010 - The Business Cycle Dating Committee of the National Bureau of Economic Research met yesterday by conference call. At its meeting, the committee determined that a trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion. The recession lasted 18 months, which makes it the longest of any recession since World War II. Previously the longest postwar recessions were those of 1973-75 and 1981-82, both of which lasted 16 months.

The recession is over but the recovery isn't gaining momentum.