MBS and Benchmark TSYs Recover from Weekend Hangover

Things can slow down at work and get busier in your personal life during December.  And regardless of the time of year, who doesn't appreciate a Friday afternoon?  And who else here has a bit of a hard time getting going on Monday morning?  Where is this all going? 

Traders are people too... 

Taking everything else we've been harping on "as read" (year end lack of liquidity), add to that tomorrow is FOMC day and today was a Monday...in December....that followed a Friday in December...and you're left with the realization that the market is sometimes left to meander where it pleases without much human oversight to moderate directionality. This allows yield levels to move in a gappy manner between long term pivot points.

In the case of the 10-yr TS note, it's pretty easy to vizualize the meandering. Yields rose into the close on FRIDAY AFTERNOON and continued to rise on MONDAY MORNING before the weekend hangover wore off....

Look!  You can see the sanity begin to trickle out right after the first red line, and woops!  What's that?!  Trickling right back in when it's time to officially start working around 11AM today.

Then again, there are other ways to look at this.  For instance, recall 3.17?  Some say that when it broke and was subsequently confirmed as resistance, that 3.34 was the next rung on Fibonacci's ladder and was a perfectly logical place for yields to go.  A bit cerebral for me, but what are you gonna do?  Can't beat em?  Chart retracements (same explanation everyone is sticking to today).

I suppose that works too...  (grudgingly!)  One could also say that the last two highs in yield are merely outer boundaries of the broad 3 month uptrend, logically ocurring in mid-Decemeber.

But speaking of big uptrends and Decembers, we have mentioned that yields were showing some repetetive patterns versus last winter.  That is still the case, but whereas we were looking at similar shapes over similar time frames, now one would have to consider the current selling to be magnified a bit, both in terms of time frame and outright movement. Take a look at Dr. Evil and Mini-Me...

But where are my manners?!  Certainly this is an MBS commentary... The selling in treasuries translated to--you guessed it!  Selling in MBS!  And similarly, they rallied, ultimately reaching Friday's levels, and pulling back just slightly from 2pm through close.

The net effect for the long term MBS chart doesn't change much.

All in all, don't read too much into today, but tomorrow things get serious.  Not only is there some mid-grade econ data on the morning calendar (PPI, Retail Sales, and Business Inventories), but the mighty FOMC statement circa 2:15 pm EDT.   And yes, it could be a market mover in either direction.  Naturally there's the default hope/assumption that given Ben's recent bond bullish 60 minutes appearance, that the statement will be bond bullish enough to give loan pricing a lift.  But there's also the risk that it doesn't come across as "downtrodden enough" and the lemmings view it as "confirmation" that the economy is indeed turning a corner.  And to use a technical description I learned in MBS commentary school: that would suck.

AQ's consumer close seems to sum up the mortgage rate environment right now....

Mortgage lenders have year-end activities too and they impact loan pricing. In general lenders are more reluctant during the holiday season to get aggressive with mortgage rates (relative to MBS prices). This slows loan production and gives the operations staff and management a chance to prepare for a new year. Unfortunately that implies we probably won't see any significant improvements in the "best execution" par 30 year fixed mortgage rate at least until next year....regardless of any significant improvements we might see in the benchmark bond market.

Plain and Simple: For 30 year fixed mortgages, there is a clear line of demarcation between 4.625% and 4.75%. If you are looking to close in the next 2 weeks...4.75% is your likely target. Very-well qualified borrowers should shoot for no points. If you are quoted anything below 4.75% with acceptable buydown costs (see chart link above), you should take it. READ MORE