MBS MORNING: Bids Lower...Focused on Supply and Non-Farm Payrolls
The short term sideways range trade persists in the market for benchmark Treasury debt.
Yesterday volatility continued to calm as market participants prepared their portfolios for an update on the health of US labor market (jobless claims today/NFP tomorrow) while listening for hints in the Ben Bernanke's testimony before the House Budget Committee. During the session the yield on the 10yr TSY note gyrated between 3.54% and 3.61% before closing near 3.549%. The steepness of the yield curve, as measured by 2s vs. 10s, ended the day at 263bps, 2bps higher from 261bps at the open.
Mortgaged-backs mostly paced the behavior of the yield curve with a few blips in prices as the Fed fought off servicer hedging activities (continually) and modest originator supply offerings. The Fed's participation was noted as being below normal yesterday...implying lender supply offerings were likely lackluster (again)...$2bn is reported median from market makers.
That said....
The perceived health of the housing/mortgage industry is now under greater scrutiny after the MBA, yesterday, reported that refinance mortgage applications fell 24% following a rise in interest rates above 5.00%. Another cause for concern for MBS watchers was some alarming dialogue from FHFA Director James Lockhart who implied the GSEs may need more Treasury Department funding in the near future. Adding to those anxieties was testimony from MBA vice-chairman, Michael Berman, who is distressed about management inefficiencies inhibiting GSE initiatives. Since "Black Wednesday" speculation has been building that the Federal Reserve will make some sort of surprise "tapebombish" announcement to calm the chaos in Treasury and MBS markets (and swaps) which would allow lenders to lower mortgage rates. Many economist deem a housing recovery unfeasible if mortgage rates rise above 5.00.....is the Fed going to use the bully pulpit to push rates lower?
Some reminder quotes from the Federal Reserve:
...from Federal Reserve's November 25, 2008 press release:
"The Federal Reserve announced that it will initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs)..... This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally."
...from Ben Bernanke's prepared testimony, June 3, 2009, Before the House Budget Committee:
"We continue to expect overall economic activity to bottom out, and then to turn up later this year. Our assessments that consumer spending and housing demand will stabilize and that the pace of inventory liquidation will slow are key building blocks of that forecast."
...from the FOMC Minutes of the April 28-29 meeting:
"Members also agreed that it would be appropriate to continue making purchases in accordance with the amounts that had previously been announced--that is, up to $1.25 trillion of agency MBS and up to $200 billion of agency debt by the end of this year, and up to $300 billion of Treasury securities by autumn. Some members noted that a further increase in the total amount of purchases might well be warranted at some point to spur a more rapid pace of recovery; all members concurred with waiting to see how the economy and financial conditions respond to the policy actions already in train before deciding whether to adjust the size or timing of asset purchases."
We agree...mortgage rates over 5.00% (combined with GSE inefficiencies and end of foreclosure moratorium) will weigh on the perception of a housing recovery...
So far this morning...
Jobless Claims data read 621,000 new filings, right on the street's expectations for 620,000 new claims. Last week's release was revised 2,000 new claims higher to 625,000. Continuing claims fell to 6.735 million from last week's revised lower reading of 6.750 million. Following the data release prices of "rate sheet influential" MBS coupons moved lower as TSYs began selling.
Why?
1. This is the third week in a row that jobless claims have fallen and the first time in17 weeks that continuing claims did not set a new record. So..fundamentally this is not negative economic news (relative to expectations)..bad for fixed income.
2. Bond markets rallied yesterday...testing the key psychological 3.50% resistance level on the 10 yr...so a retracement is expected. The range should moderate as market participants are focused on staying sideways ahead of Friday market moving data. Stocks indicate similiar sentiment...a general ho-hum attitude as the data was close to expecatations. Everyone is waiting for the big kahuna tomorrow...
3. This morning the Treasury will announce auction supply for next week's scheduled refunding of 3s/10s/30s...more TSY note supply makes fixed income traders anxious about budget deficits and inflation (technically the market is worried about amount of negative convexity outstanding and extension risk).
4. The freefall of the dollar and required rate of return for US dollar denominated investments...a weakeneing dollar will force fixed income buyers to demand higher yields.
MBS prices are, however, still being driven by the gyrations of the yield curve...which is being moderated by market participants "selling into strength" and covering short positions as prices fall and yields rise. At the moment TSY traders are focused on the above outlined fundamentals....which allow for profit taking and higher yields...which is why MBS prices are lower this morning. Volatility should continue to calm ahead of Non-Farm Payrolls...this will be a good thing for "rate sheet influential" MBS coupons as it limits the need for servicers to hedge against negative convexity and the loss of servicing income. Barring any tapebombs the fixed income market should move back to mid-range levels by days end as investors prepare for tomororow...
The MBS market, like all others, is awaiting some sentiment shifting event...perhaps an unexpected communication from the Federal Reserve...or an economic data release that realigns the markets perception of economic realities...
What Else is in focus:
Financial Regulation
The ECB and Bank of England, as anticipated, leave their key interest rates unchanged
PPIP may no longer be needed
2s/10s: 271bps
6/3 EFFECTIVE FED FUNDS: +0.00 to 0.21 from 0.20
LIBOR FIXINGS
O/N LIBOR: -0.0006 to 0.2606 from 0.2612
1 MONTH: -0.0012 to 0.3175 from 0.3187
3 MONTH: -0.0075 to 0.6294 from 0.6369
6 MONTH: -0.0275 to 1.1800 from 1.2075
1 YEAR: -0.0362 to 1.5475 from 1.5838