Stored Energy Released. Bond Market Needs More Rally Motivation

After failing to confirm a break of the broader 3.27 to 3.56% range, benchmark 10 year TSY yields shot 13bps higher in an aggressive manner this morning, releasing stored energy in an originator unfriendly direction. This has led production MBS coupon prices sharply lower in just a matter of minutes, which may lead to reprices for the worse or the delayed release of initial loan pricing offers.

The 10 yr note is currently -19/32 at 93-18 yielding 3.403% (+7.2bps from the open). The 2s/10s curve is 5bps steeper at 280bps wide. The February FNCL 4.5 MBS coupon is -7/32 at 102-09. I've got the secondary market current coupon 6.4bps higher at 4.104%.  MBS are outperforming ever so slightly into the bear steepener but will soon extend if the sell off continues which would surely lead to further weakness in MBS valuations.

Although we have heard several rumors spanning from a fat finger all the way to an improved outlook in Spain, we recognize the fact that 10s had been teetering on a breakout to lower yields for a few days and had repeatedly failed to find the right motivation to force yields through technical resistance at 3.27%. This led to profit taking and rate lock selling. In regard to the fat finger idea, no block trades have been reported by the CME yet, we did however note a "sell now, ask questions later" mentality into the downtrade.

WE TALKED ABOUT STORED ENERGY HERE

We are hopeful that short sellers will use this as an opportunity to book a profit and square up their positions, which should reduce resistance against vs. another attempt at a range break. But if 10s do break a cluster of  3.42% support, we could see benchmark yields move all the way back up to 3.50% again. This would push the FNCL 4.5 back into the 101 price handle and lead mortgage rates higher.

While this behavior will undoubtly hurt loan pricing this morning, don't take this move a dire sign of more loan pricing pain to come...we're still well-within the range.

We knew the move lower was not going to be easy, we need more motivation. Play the range in the mean time....