With The Week's Data In, Bonds Rally. MBS Much Better.

By: Matthew Graham

Lots of econ data came out this morning and for the most part has had good effects on the bond market as a whole, including MBS.  FNCL 4.5's are up 11 ticks at 101-05, their best levels in over two weeks, and nearing their highs from 2/4/11.  Here are recaps of the various economic reports that came out this morning:

- Consumer Price Index, Jobless Claims, Philadelphia Fed Index, Mortgage Delinquencies, and Leading Economic Indicators

Today, we'll be focusing mainly on the 10yr note in our analysis.  I wrote a live update on the MBSonMND Dashboard that explains why.

(9:33AM)Bullish Breakout Failed, BUT MBS Remain High Enough For Improved Pricing... Why all the talk about 10yr notes when MBS are the drivers of mortgage rates? Especially in times where broad trends may be shifting, we need something "vanilla" to act as a "benchmark" for the broader bond market sentiment. But because MBS trade at a spread to risk-free bond benchmarks, they are an additional degree of separation away from representing the central tendencies of the overall bond market, so 10's are the best bet. 10's are merely a yard-stick. And the yard stick failed on it's first attempt to break out the lower end of it's recent range. It's not all bad though... If that happened, we were looking for support (a ceiling for rising yields) based on yesterday's low yields. We got it! Right about 3.584. Now we watch and wait to see whether that level breaks or whether the previous low of 3.561 breaks. This all has more to do with how the rest of the day might go, but as far as this morning is concerned, FNCL 4.5's are at two week highs of 101-03, meaning you should be seeing much improved pricing if you get sheets while MBS remain above 101-00.

The first round of data this morning (CPI and Claims) was enough to get bonds moving in a positive direction, and even taking the first step at confirming a breakout of the recent trend that has contained them.  In fact, the first round of data, namely: CPI, was tame enough to suggest and confirm the current rally, but markets had to ask the next round of data : "Is that your final answer?"  In other words, we saw stronger than expected Philly Fed numbers result in further gains for bonds; a bit paradoxical.  But in actuality, the market was simply waiting for 10am data to have it's say before considering the big picture this morning.  The movements in yields since then suggest the econ data at 10am was NOT ENOUGH to reverse the changes already set in motion.  What changes you ask?  Take a look at the recent trend channel and the breakout that is being confirmed in high volume so far this morning:

Those are gorgeous technical movements!  Even looking at things on a horizontal level, the short term pivot point is good.

Zooming out now to a long term daily chart, we can see an even lower pivot point that could signal a shift in momentum in terms of 3pm yields:

All of this positivity in the broader bond market has translated to excellent gains for MBS and lenders are coming out with some of best pricing this month.  Rate sheets are very strong.

Bottom Line: I think what we see today is a breakout of the mid-term diagonal trend channel, which we've already seen and that the rest of the day is about confirming that and supporting it. Doesn't really matter how much more we rally as long as we hold that pivot based support from the previous low end of the trend channel.  So watch the broken resistance levels for support through the rest of the day.  If those fail, we'll assess from there.