MBS OPEN: Testing and Retesting Bearish Biases
Good Morning. The yield curve continued to flatten in the overnight session. 2s vs. 10s sit at 250bps after closing near 254bps yesterday. We have indeed seen the bond market's appetite for longer duration debt pick up following the completion of this week's mini-refunding process (convenient). Unfortunately technical indicators on the 10 yr remain bearish as traders are still hesitant to let profits linger for too long...selling into strength still moderates upside potential
At the moment 10 yr traders are testing yesterday's closing levels...if the 10 yr note yield can hold levels below 3.83 it would indicate mounting momentum. If we fail to hold 3.83...3.85 is next supportive yield range. Blowing out past 3.85 signals more weakness ahead...and a need for higher hedge ratios for mortgage bankers (lock more loans).
Mortgage-backs had a GREAT DAY yesterday. Speculative bargain buyers were out doing some bottom fishing....most accounts were moving "down in coupon" as the relative richness (tight yield spreads) of fuller coupons, like 6.0s and 6.5s, has forced some market participants to jump on the convexity (adding duration, moving closer to "current coupon") bandwagon. This is a good thing for "rate sheet influential" MBS coupons as it provides a little more liquidity (still no supply) and helps add a competitive tone to the marketplace in general. That said...yes MBS detached from TSYs a bit yesterday, but as previously mentioned there is still a bearish bias moderating the gyrations of the yield curve. The point? We are excited about a possible shift in sentiment (maybe some window dressing support) in fixed income...but we remain very defensive as the market progressively adds duration by moving "down in coupon". Dont forget how volatile MBS has been over the past two weeks...especially with lots of data on the calendar next week.
This morning the FN 5.0 is testing yesterday's high price mark. If the 10 yr note yield moves higher (3.85)...look for the FN 5.0 to fail this retest and for prices to move lower.
Bearish biases in fixed income (technical bias fed by fundamentals) are being put to the test today. There is still a "big picture" focus in the marketplace. That said..professional traders will continue to implement short term strategies that account for a wide variety of outcomes. You should do the same with your pipeline. My hedge ratio is still 90%....but I have relaxed from 95% which indicates I am more willing to float. BUT 90% IS BY NO MEANS AN AGRESSIVELY FLOATING STANCE...IT IS DEFENSIVE.
6/11 EFFECTIVE FED FUNDS: -0.01 to 0.17 from 0.18
LIBOR FIXINGS
O/N LIBOR: -0.0012 to 0.2600 from 0.2612
1 MONTH: -0.0012 to 0.3181 from 0.3194
3 MONTH: -0.0050 to 0.6244 from 0.6294
6 MONTH: -0.0337 to 1.1838 from 1.2175
1 YEAR: -0.0575 to 1.7325 from 1.7900