MBS Higher and Tighter But Running Into Technical Resistance

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Rate sheet influential MBS coupons continue to benefit from favorable supply and demand technicals and an on-going chase for yield. As a result, production MBS coupons have displayed resiliency against the choppy behavior of their benchmark guidance givers (TSYs/swaps). This has been the most obvious theme over the past few days in the TBA market...besides the street being short higher coupons after coming to the realization (again) that credit impaired borrowers still can't execute their embedded call option (refinance).

The December delivery FNCL 3.5 is +0-04 at 101-06. The December delivery FNCL 4.0 is +0-04 at 103-13.  In my model the production coupon is 3.39%. There isn't much volatility in the basis but I've got yield spreads marginally firmer on the day, but slightly off their tights (profit taking after recent outperformance). Less than $1 billion in new loan supply has been offered so far.

The FNCL 3.5 is running into trendline resistance....

Current coupon MBS are outperforming TSYs but that can happen no matter the direction MBS prices are moving (it's all relative). We must thank TSYs and swaps for today's upward price directionality. The 5 year note is +0-02 at  99-30 yielding 1.086%(-1.6bps) and the 10 year note is +0-04 at 101-12 yielding 2.466% (-1.4bps).

This is great news but we are running into that resistance level that I said would be tough to break last week: 2.46%

Of course that inflection point could be broken at 2pm today when the Fed releases the Beige Book or if stocks suddenly sell off, which doesnt look likely but we may soon see profit taking in the futures pits.  S&Ps are currently +13.50 at 1177.50, largely thanks to broad based advances in the commodities.

It's certainly not the Financials, which continue to lag. The Materials sector leads the way.

If you are hoping for better pricing, keep your fingers crossed for QEII supportive comments in the Beige Book. 2.46% in 10s and 101-04 December in FNCL 3.5s must be broken.

Loan pricing is on average 18.9bps better today with the largest rebate improvements in the note rates closest to par. One of the majors is actually priced worse then they were after reprices for the better yesterday afternoon, so they might offer up a reprice for the better if this modest rally turns into something more substantial.