MBS RECAP: 1/10/2011

After the 3pm bond market close, 10yr yields have diverged from stocks as both markets make gains (yields down in bonds as stock indices move higher). MBS have paced treasury benchmarks fairly well except that 4.5's seem unwilling to crack the 102-26 mark. No implications and no worries for the mortgage market as this indecisive low volume is an expected prelude to the coming days. 10yr yields just under 3.30 at 3.2929. zero risk environment as lock cut-offs approach.

Why not leave the range as equivocal as possible at the bond market close?! In the last half hour of trade before the Close, 10's operated decidedly between 3.31 and 3.30, though we don't know that we much care, considering the volume. MBS do seem to care, however, as those unsupported movements in benchmark yields were apparently the cue for MBS to move to their highs of the day, pushing 102-27. Zero risk of reprice for the worse.

Upon moving to their weakest levels of the day, treasuries and bonds threatened--albeit with mouse-like fervor--to break to even weaker levels, outside recent short term trends. This has not happened! Risks of reprices for the worse are evaporating as a result. Bonds apparently got the motivation for one of their bigger support bounces of the day as stocks failed to break into 1270 in S&P's. 10yr Cash subsequently broke lower in yield at the best pace of the day as 3.325 held firm. MBS are tagging along as well with 4.5's off their lows and ticking up to 102-23. The whole affair is taking place in the lowest volumes of the day as even the 3rd consecutive test of 120-22 in 10yr futures held completely steady in it's previously low volume trend, despite a bounce up to 120-25+

Risks are picking up somewhat as the recent twofold instance of support for treasury benchmarks at 3.3219 10yr yields has broken. Please keep in mind, these are microscopically small movements in a low volume environment. As such, MBS are down just slightly at 102-22, but as these are in line with the lows of the day, it bears mentioning as a minor increase in reprice for the worse risk. The more important trading action this week is expected to remain centered on the auctions.

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After two prominent yield highs in benchmark 10's at 12:27pm and 12:46 pm which occurred at a yield of 3.3219, a retracement occurred which has resulted in yields now testing the last two prominent yield highs at 3.3103 which occurred at 11:42am and 12:10pm. This previous support is now tested as resistance. A break below would signal a safer reprice environment for the rest of the day, whereas a bounce leaves us rangebound pending a retest of today's high yields, but of course we'll examine those objective eventualities with the benefit of 100% accurate hindsight.

HOUSEHOLD DELEVERAGING TO CONTINUE IN 2011 // CREDIT MARKETS HAVE IMPROVED, STILL NOT FULLY HEALTHY; SEES SOME EXPANSION IN 2011 // STAGE IS SET FOR SOME CREDIT EXPANSION IN 2011 // REPEATS FED'S MONETARY POLICY NOT INTENDED TO INFLUENCE DOLLAR EXCHANGE RATE

LOCKHART SAYS U.S. ECONOMY GAINED 'DURABLE MOMENTUM;' FED'S QUANTITATIVE EASING HELPED // REMAINS 'COMFORTABLE' WITH HIS SUPPORT OF FED'S $600 BLN BOND-BUYING PROGRAM // DOES NOT EXPECT QUICK ECONOMIC FIX // FRIDAY JOB REPORT CONFIRMS ECONOMY MOVING FORWARD AT MODEST PACE; LABOR MARKET IMPROVING // LITTLE SIGN OF INFLATIONARY PRESSURES (Source: Reuters)

Without data today, and with relatively little upon which to trade, a reasonably connected stock lever is no big surprise. And so it's no big surprise to see treasuries back up slightly as stocks continue to make bull-runs at a recent 1269 pivot. If they definitively fail, it could usher benchmarks back to their own resistance, thus keeping MBS strong, whereas a definitive break higher by stocks would likely coincide with 10's back in the thick 3.32-3.35 range of late, potentially unsettling MBS enough for a sub 102-20 reprice-risk range.

Once benchmark 10's hit the 3.27s there has been a steady and firm retracement back to 3.30+. 3.27 is part of a band of resistance from 3.25 to 3.29 that we expect to be a challenging break considering next resistance is highly isolated and significant at 3.17. MBS are off their 102-27 highs, currently back at 102-24. Not risking reprices for the worse yet unless this trend continues.

Flows largely favored 10 year note buyers this morning but we have witnessed a clear push back from the dwindling short base as the benchmark 10yr note has approached and crossed through 3.30%. This is likely in anticipation of Treasury coupon auctions to come on Tuesday, Wednesday, and Thursday as investors look to price in whatever concession they can to cheapen up their debt supply underwriting costs. ($66bn in 3s/10s/30s)

Reuters notes that the Fed will begin consolidating CUSIPS (tracking numbers on MBS) in it's portfolio from 44,000 to less than 10,000, citing administrative cost reduction. The Fed says: ""No inference should be drawn from CUSIP aggregation about the timing or nature of any future monetary policy actions," and we quite agree. If you hear any speculation as to the implications here, disregard.

The Washington Post highlighted some data behind the sharp losses in December. In so doing, they also unintentionally are suggesting a contributing factor in recent bond market resilience. Primary dealers reduced their holdings of treasuries at the fastest pace since 2004, from $81.3bil to $2.34bil (11/24 to 12/29). In conjunction with the shedding of tsy allocations in portfolios and nominal year end window dressing, we have a lot of causality with which to view December drama. On the upside for bonds however, this speaks volumes to the POSITIONAL REBALANCING we've recently noted.

10yr yields have now touched 3.27's on the day, in line with the lowest yields seen on 12/31. The longer we stay here or further we improve, the more likely it is that we see a test of the next resistance levels around 3.25. From there, it's a large step to the next resistance at 3.17. For MBS, 4.5 FNCL's are at 102-27, best levels of the day.

First layer of downside risk at 102-17. Second layer at 102-10. First upside layer at 103-02. ***It's advisable to synthesize these targets with specific lender behavior. If a lender has a tendency to reprice more or less aggressively than average, adjust accordingly. Levels apply best to lenders releasing rates within a 1 hour window centered on the time of this notice.

Validation and sighs of relief this morning as the healthy gains from Friday's post-NFP are proving to be more than just a passing fancy. A plateau of sorts was reached last week as bonds moved sideways after reaching their best levels just after Noon Friday. Opening levels not only remain in that range, but are in fact at the high end in MBS 4.5's which are up 3 ticks at 102-24. Barring any concerted selling effort, this should bode well for morning rate sheets.