MBS RECAP: 1/24/2011

In the previous update, we noted the potential net effect of earlier movements in the 10yr yield could serve to merely adjust the range of the trend-channel slightly wider. So far, that seems to be what we're seeing in the after-hours session. This could set up momentum going into tomorrow's auction, with a positively received auction serving to preserve the channel.

After 10yr yields moved higher past both the horizontal and diagonal technical support today, there has not been an uptick in volume and neither have they continued to forge into higher territory. Mos likely, this will merely lead to an adjustment wider of the trend channel and end up looking like a failed pivot confirmation only. In fact, everything is largely sideways as FNCL 4.5's continue to hover in their same range around 102-04, currently at 102-03.

Previously, we had discussed the intersection of horizontal pivot-point and the resistance line of today's trend channel just between 3.4 and 3.41, yields have broken through this level, but the lack of volume or convicted follow-through casts it's significance into doubt as a precursor of reprices for the worse. Nonetheless, it's a possibly negative technical development that we'll need to watch closely to see if volume or momentum picks up.

While the trend channel noted earlier today continues to provide resistance to tepidly rallying 10yr notes, the pivot point just under 3.41 (Friday's low yields) has not been revisited. In the past half hour, yields moved about 2 bps higher and may attempt to test the pivot point, which incidentally coincides with the upper line of the trend channel at this particular time of day. If they break, it's likely bad (short term) news for MBS as well, but nothing is too dire on this data-less Monday with light volume.

Conventional 30 year fixed loan pricing is 21bps better on average today with the largest rebate improvements seen in the loan paper used to fill 4.0 MBS trades: 4.375% to 4.625% notes. These gains are however not large enough to move the BestEX C30 lower from 4.875%. On average, among the five majors, the permanent buydown from 4.875 to 4.75% costs 93.8bps, illustrating a lack of liquidity in FNCL 4.0s.

After the conclusion of the open market operation Fed Buyback, yields moved slightly higher, but thus far have gone no higher than the lowest yields seen on the 21st. This is a promising pivot point from which to begin the week, but MBS would like to see more commitment from treasuries as the FNCL 4.5 remains down a few ticks at 102-01. 10yr yields at 3.4005 remain to close to declare definitely supportive of the pivot point at 3.4062 so we'll need to watch and wait for it's confirmation or rejection.

Benchmark Treasuries are holding steady near their best levels of the day after the Fed lifted $8.9 billion in Treasuries this morning. However the same cannot be said about production MBS coupons which are underperforming benchmarks (yield spreads wider). This is indicative of focused selling and a general lack of demand for "rate sheet influential MBS. If Treasuries fail to maintain positive progress and benchmark yields begin to rise, MBS prices are likely to fall faster which would lead to reprices for the worse. BEWARE: trading volumes are generally low and the chance for price volatility is high.

Following the Fed's POMO wrapping up at 11AM, treasuries continue to operate in the best section of their trend channel, still pushing the bullish end, now with 10yr notes at 3.407. MBS FNCL 4.5's have picked up a tick in the process, now standing at 102-05. However, they'll need to break 102-06 to get into their highs of the days. Despite the fact that recent weeks have usually seen a more bullish bond market following Fed POMO's, this is not necessarily a safe assumption on an ongoing basis if the details released about the operation vary from the recent norm of lifting On-The-Run securities.