The Week Ahead: MBS Roll Tuesday, Treasury Auctions and Retail Sales

Sometimes everything comes together just perfectly.  Last week was one of those weeks as far as MBS were concerned with Friday's reaction to the Job's data being the crowning achievement.  Bond markets had already been in a 'best-case-scenario' rally with European headlines taking the week off and a series of soft readings on labor markets starting mid week.  The fact that the most important labor market metric--Friday's jobs report--was also the most astonishingly weak of the bunch, took an already impressive rally further still.  

For MBS specifically, it was the best week since June 2012 in terms of closing levels vs opening levels (Fannie 3.0s moved 1-06 higher).  Prices crossed into the 104's in Fannie 3.0 coupons--levels not seen since mid January.  While prices made it back to those older levels, it's going to take more time to coax lower rates back into the market to the same extent.  To that end, the following chart is telling.  It shows Fannie 3.0 prices in green/grey candlesticks moving back over 104-00.  The red line is the difference in price between Fannie 3.0s and Fannie 2.5's--an early indicator of 2.5 coupon liquidity.  The more liquid 2.5 coupons are, the more we start to see those low 3% rates that were in the process of dying off into the new year.  The higher the red line, the tighter the spread.  

If it looks like MBS have broken out above 104-00, keep in mind that tomorrow is the roll (monthly settlement for Fannie and Freddie 30yr Fixed coupons).  April coupons will be retired and the income May coupons were trading right around 104 at the end of last week.  The implied risk here is that 104-00 sets in as resistance.  Same story for 1.67+ in 10yr Treasuries.  We've seen that level in the past when market participants rushed to recover from a feeling of being "offsides" (which is how we tend to view last week, in that there were a preponderance of short positions hoping for higher rates that were systematically wiped out by the snowball rally, merely adding to the snowball's mass):

Would 1.67 resistance in 10yr yields be such a bad thing?  After continually running into a floor at 1.83+ for the past two months, certainly not!  But it would be even better for MBS if Treasuries manage to avoid making any sudden moves back above 1.83+ at the beginning of the week.  To that end, there's not much happening on Monday, with only a few pieces of data that don't even make the list as potential market movers.  Tuesday is only slightly more interesting with just Wholesale Inventories at 10am and the start of the Treasury Auctions with the least consequential 3 yr tenor.  Things pick up in the last 3 days of the week as FOMC Minutes and the 10yr Treasury Auction make for a busy Wednesday afternoon.  Jobless Claims and the auction cycle conclusion keep Thursday interesting and Friday brings the mighty Retail Sales data as well as Consumer Sentiment later in the morning.