MBS RECAP: 1/6/2011

3.42+ continues to turn away rising yields as we tick into the less liquid after hours part of the day. The ability of benchmark treasuries to hold support today has given MBS a chance to put in some gains with the 4.5 now at 102-03 and both coupons closest to par riding upward trend channels. Late day reprices for the better are still possible, but with NFP looming early tomorrow, perhaps not as likely as they otherwise might be.

(Reuters) - An effort by Republicans in the House of Representatives to repeal the healthcare law enacted last year would add to already huge federal budget deficits, the Congressional Budget Office warned on Thursday. In a preliminary estimate of legislation the House is set to begin debating on Friday, the CBO said that repealing the Democrats' signature healthcare law would increase federal budget deficits by roughly $145 billion by the end of the decade, a slight revision of its earlier $143 billion

(Reuters) - Two packages exploded in the mailrooms of two Maryland state government buildings on Thursday, but no one was seriously injured, a federal law enforcement official said. http://www.reuters.com/article/idUSTRE70551120110106

We haven't seen 10yr yields tick against support levels this frantically for a long time... No fewer than 29 consecutive touches on support just over 3.42. This makes it somewhat more likely that yields will hold here through the close, which may put reprices for the better back within reach.

3.42 comes into play once again for 10's as yields recently crested that mark as stocks ran back up to their best levels since before 11am. Volume is on the decline. This bumps bonds OUT of their previous trend channel as 10yr futures are looking for support around 119-25. That SHOULD coincide with 10's being able to hold under 3.43 if it pans out, but the concomitant 3 tick loss in MBS makes reprices for the better less likely than they once were for lenders who haven't repriced already.

The S&P 500 is -0.27% at 1273 and the Dow is -0.31% at 11,686. A stronger dollar and weaker commodities do not seem to be helping but Telecom is the biggest loser on the S&P with a 3.06% decline. The dollar index is +0.73% at 80.843. Light Crude is -1.83% at 88.65.

BOND BEARISH NEWS... (Reuters) - The United States may hit the legal limit on its ability to borrow by March 31 and faces serious consequences unless Congress acts by then to raise it, Treasury Secretary Timothy Geithner said on Thursday. "Even a short-term or limited default would have catastrophic economic consequences that would last for decades," Geithner said in a letter to U.S. Senate Majority leader Harry Reid that was issued by Treasury. http://www.reuters.com/article/idUSTRE7053C520110106

(Reuters) - A top Republican on Thursday said he will push for legislation that requires the Federal Reserve to focus only on inflation, and not employment. Representative Paul Ryan, the new chairman of the House of representatives' budget committee, made the comments a day after his party took formal control over the House.

We are hearing scattered reports of reprices for the better. These reports are not widespread though. Loan pricing was pretty mixed this morning. Some lenders were marginally worse others were marginally better. Scattered strategies reflect increased volatility in the MBS market yesterday. Some lenders repriced for the worse multiple times. Others did not. Some owed you bps. Others did not.

Source: Bloomberg http://www.whorunsgov.com/Profiles/Gene_Sperling

After spending some decent time and volume trading under 3.42, the new yield low at 3.39 lined up with marks around 1100am and 930am to form the lower line of a nice intraday trend channel. Parallel to that line, it's easy to see where the support has been. 10's JUST NOW backed up to 3.42, but so far have not broken back higher. This would keep that trend channel roughly intact, something we normally wouldn't care about too much this time of day except for the fact that volume has stayed healthy and steady.

Stocks sold off fairly well from 1040am to 1110am. Since then, they formed a triangle of converging trends which was just broken on the upside--not normally good news for a bond market that has been keeping moderately connected to stocks today. This threatened to take 10's back over 3.42, but so far that has not happened. Unless stocks stall out here, bonds will have to decide to what extent they're prepared to march to their own beat.

In a beautiful display of technical support, 3.4287 turned away rising yields that had threatened to void the recent break below 3.42. After support held there, 3.42 fell shortly thereafter. But just to make a strong nod to the technical move, yields again tried to bump up into 3.42 13 TIMES IN 2 MINUTES! It held it's ground, sending yields into the 3.3's we're now seeing. Enjoy reprices.

Just before 1130am, 10yr yields shot lower past 3.4287 and momentarily broke the 3.42 resistance target. Interesting action since then as it retraced back to 3.43, bounced back lower to 3.42, but failed to break through a second time, bouncing right back to 3.43, where it currently sits. From a technical perspective, the recent break below 3.42 supports the notion that yields can return there or otherwise continue a developing trend channel pointing to slightly lower yields. MBS remain relatively flat until benchmarks make up their mind with the 4.5 at 101-31.

10yr yields are once again knocking on the door at 3.4287, remember they need to make it past 3.42 to confirm!

After 3.46 held up as support in 10's, note that yields moved back down exactly to the 3.4287 resistance. Sadly, we've already bounced there and are closer to 3.44 at the moment, so it's just another grind against the prevailing resistance of the morning. It's possible that today could be quiet enough to have seen the extremes of the range today, but failing that, just be aware, either 3.46 or 3.42 will mark the breakout of that range.

After 10yr yields failed their 2nd test of 3.4287, the rubber band snapped back and yields subsequently shot uncannily to previous 3.46 support and have since moderated back down toward 3.45. MBS 4.5's sold down to 101-28 in concert with this. Outside chances of knee-jerk reprices for the worse only from lenders who were out early with pricing.

Once again, we are dealing with 2 clearly delineated horizontal levels in 10yr notes providing resistance to further gains: 3.4287 and 3.420 even. Yields have bounced on the former too many time to count this morning and made it through twice, most recently at 9:14am. But a shift to lower yields won't be confirmed unless 3.420 subsequently breaks, and once again, yields have bounced and returned back to the 3.43's. So far, the market is saying it "needs more" in order to be more supportive of sub 3.42 yields.

After bouncing twice on 3.4289, 10yr notes are languishing sideways in the 3.43 area. So we're left with a morning that is not quite as bullish as it might be, but well off the 3.48 "going out" levels. 4.5 MBS are fighting for 102-00.

With Jobless Claims slightly weaker than expected, and coming on the heels of a moderate show of support from real money overnight, bonds are firming up inch by inch and have now crept back to the 3.4289 Support level that held so nicely through 11am yesterday. Approaching this from the other side now makes it RESISTANCE, so don't expect a straight shot through.

Source: Reuters

Source: Reuters

Source: Reuters

Source: Reuters

Source: Reuters