Rate Movers: Political Gamesmanship and Curve Spreads
The day got off to a slow start with both benchmark TSYs and "rate sheet influential" MBS experiencing modest price declines as stocks ventured marginally higher.
Lenders who did not reprice for the better yesterday afternoon passed along gains this morning, which essentially erased today's weakness and left pricing unchanged. Lenders who did reprice for the better yesterday took back those gains this morning, leaving loan pricing basically unchanged. It was a real barnburner.
Rates did however begin to improve following a surprisingly strong long-bond auction at 1pm. And then extended their post auction rally following comments from the White House that it was close to an additional $200 billion in spending cuts. Positive MBS price action was short lived though. Republican House Speaker John Boehner quickly responded in a bond bearish tone...
(Business Insider) - Speaker of the House John Boehner (R-OH) said he has "no idea" if the contingency debt limit plan introduced by Sen. Mitch McConnell (R-KY) could pass the House. In a press conference Thursday he said the last ditch effort is "worth keeping on the table." Republicans used the overwhelming majority of their remarks at an afternoon press conference to push for a balanced budget amendment to the Constitution, encouraging Democrats and Obama to support a measure that is by nearly all accounts a non-starter. "We are not going to raise the debt ceiling if we don't have cuts in excess [of the amount on the table], we are not going to raise taxes, and we need a structural solution to keep this from happening again," said House Majority Leader Eric Cantor (R-VA).
Earlier today, on the MBS Dashboard we said to expect the long-end of the yield curve, which is most influential over mortgage rates, to sell off the most on unfriendly debt ceiling talks. That was indeed the case into the reversal trade this afternoon. As of 415pm the 10yr note was -20/32 at 101-14 yielding 2.957% (+7.3bps) and the 30yr bond was -45/32 at 102-00 yielding 4.258% (+8.2bps). These were the fastest selling spots on the steepening yield curve.
Explaining Yield Spreads and the Curve
2s/10s moved up 6bps to 259bps wide and 2/30s steepened 7bps to 389bps...
Up until now the bond market has generally ignored debt ceiling headlines. There's been too much noise surrounding the entire situation and no one really thinks the U.S. will really default on its debt obligations. But that's not what happened today. The long end of the yield curve finally reacted negatively to bond bearish debt ceiling headlines....
This reaction may just be a one-off event based on trading technicals. The 10-yr note did bounce AGGRESSIVELY at a key technical resistance level (2.90%) after Boehner's headlines crossed newswires. That makes a tech-based reversal a valid explanation.
OR.
This could be the start of something new. Bonds are looking technically overbought and the economy has yet to confirm a continued slowdown is in progress. That means there is little new motivation for a sustained break of said 2.90% resistance. With 10s out of room to rally, perhaps the market's attention is finally shifting toward domestic politics and the debt-ceiling????
The potential for ongoing EU tapebombs and the strength of this week's auction cycle, especially the long-bond, paint a totally different story though. One that is more supportive of lower mortgage rates and a flatter curve (370bps = 38% retrace level). But investor boredom combined with technical sell signals certainly make one wonder what direction we're headed next. Phew. The best thing for this market right now seems to be the weekend. There's just too much bullsh*t floating in the water to make any broad sweeping assumptions about strategic directionality. Stay nimble...