Rates Rally. Reprices for Better Reported. Beware of Profit Taking

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Although there is a clear curve steepener bias, 2s/30s 5bps wider, 5s/30s 9bps wider, 5s/10s 4bps wider, 10s/30s 5bps wider, the combination of disappointing job creation data and dovish Fed Chairman commentary has led to an originator friendly move in the bond market. The belly of the beast is full of encouraging activity. Trading volume is high,  money flows are positive and implied volatility is deflating. We're approaching face melting status, but also running out of room to rally within the range. 

5s are the star performer with an 11.6bp decline through 2.00% resistance to 1.953%. 7s are the second best performer with a 10.3bp rally down to 2.681%. And 10s get the bronze medal with a 7.7bps yield decline.  Outperformance in the belly of the yield curve is what drives "rate sheet influential" MBS prices higher.

Fibonacci Retracements are one of my favorite predictive tools. Yesterday I added a fan to the Dec.29 FNCL 4.5 price low. This statistical guidance giver is doing its job this morning. The FNCL 4.5 is +16/32 at 102-19. Current coupon MBS yield spreads even moved tighter into the rally presumably a function of short covering in the TBA market.  Spreads have however leaked a bit wider into higher prices as originators add pipeline coverage. We've heard scattered reports of $1.5 to $2bn already offered by lock desks/hedgers.  Most of which has been focused in 4.0s and 4.5s  (half tick market in 4.0s!)

These price appreciations have led to reprices for the better. Rebate was already noticeably improved this morning. We're waiting for more reprices to update our model before citing the new best ex range (if it changed).

Price action has been encouraging so far today, but the rally has not ventured outside the range we discussed last night. With 10s approaching 3.30% we are beginning to see more two-way flows, meaning traders are getting defensive as the rally is rapidly running out of room. We're gonna need another round of real$ buying for the rally to extend and break range resistance.