MBS RECAP: Stable Rally All Day Long

The morning hours were much busier by comparison, but volume has died down a bit into the afternoon. This hasn’t given way to much, if any volatility as MBS have been on cruise control just under a long term pivot at 102-30. 10yr yields are coasting sideways in the 2.18's (yes, that's a "1" you see there after the decimal point!). It's interesting to consider that we may have been just as surprised to see the same digit two weeks ago when hoping for yields around 2.08 to hold as a supportive ceiling before the sell-off.

But the snowball selling is currently taking a break, giving snowball buying a chance to run it's course. This isn't anything dramatic, mind you, just the reverse process of bond market longs getting stopped out. This time, recent shorts, especially among the more tactical hedge-fund and "fast money" type accounts, are being forced to cover, raising prices and stopping out additional shorts.

Meanwhile, there's been good demand from longer term interests, especially into month-end/quarter-end, not to mention a bit of Asian buying in the overnight sessions as Japan contends with their year end. 2.21% in 10yr yields had been the next target in the correction and if we're moving lower in yield yet again tomorrow, technical considerations get intense in the mid 2.16's, at which point there's a gap the the 2.13 retracement level.

That was basically the very last line of defense before the big sell-off and thus would be a "full circle... what do we do now?" sort of technical event., though there are arguments for the preceding modal (most frequently recurring) highs around 2.08 being and even more important pivot point. Let's not get ahead of ourselves though... We remain in the 2.19's in 10yr yields and capped out by the 102-30 pivot point in Fannie 3.5 MBS for today. Tomorrow is anyone's game.

From Rosengren's Speech:

I would re-emphasize that financial-market and economic conditions have been improving since the start of the year. Central banks have played an important role in encouraging more economic growth. In the United States, accommodative monetary policy has been essential to improving financial conditions, but growth remains disappointingly slow to date, and significant downside risks remain. Should growth slow down more than is expected, more policy accommodation could be advisable.

Even if growth should improve more than expected in the U.S., the country will likely remain far from what anyone would consider full employment – so in my view policy accommodation should only be removed once it is clear that the Fed’s dual mandate can be achieved within a reasonable period of time.

As with monetary policy, work remains to be done to improve financial stability. Today I have highlighted one area that deserves more attention – ensuring that we reduce the risk of disruptions to credit flows that result from wholesale short-term funding problems, and that require central bank intervention.

It's likely a bit early for all but a few lenders to be repricing for the better, considering the decent measure of gains that existed at the time most rate sheets were released, but indeed, we've now made sufficient additional gains for lenders to begin considering positive reprices. As always, the longer current levels are held or the more they're improved upon, the better the chances. Bottom line, no fear/risk of negative reprices at the moment.