MBS OPEN: Weaker After Data and TSY Profit Taking
MBS
-Facemelter (huge rally) after surprisingly strong demand at 10 yr note auction. Time for current coupon heavy weight title belt battle?
-"Rate sheet influential" MBS coupons failed to keep the pace with benchmark Treasuries (yield spreads wider)
-Volume in July delivery month coupons was, however, well below average as MBS investors prepare for settlement day....TODAY IS NOTIFICATION DAY!!! Most accounts trading the roll (forward month coupons). Anyone remember what this means for prices?
-Mortgage bankers locked in measly $1-2bn MBS. Rate sheets only marginally improved after reprices as lenders look to hedge from further "fall out" risk. Still seeing some rate sheets below 5.00% now (most qualified borrowers only!)
-Servicers were buying current coupon/rate sheet influential MBS...we call this buying convexity which signals a move into longer duration assets. Good step in confirming bullish bond bias. Good step towards better mortgage rates.
-"Up in Coupon" continues to dominate after eMBS prepay report indicates that borrowers still face roadblocks to refinancing. Here are FN 2008 production year prints: 4.5 CPR: 16.3 June vs. 19.9 May. 5.0 CPR: 26.0 June vs. 28.3 May. 5.5 CPR: 31.1 June vs 32.7 May. 6.0 CPR: 29.8 June vs 29.6 May.
-Prices noticeably lower this morning as TSY traders take profits and flight to safety trades are unwound (stocks looking to move higher) plus jobless claims better than expected at 565,000 vs expectations for 605,000. Continuing Claims set new record, rising to 6.883 million.
Remember MBS will be weaker into selloffs as convexity crowd remains nervous of sentiment switch on Wall Street (risk averse or not? stocks gonna sell off more or move higher in the range?)
TSYs
-Considerable yield curve flattening after strong demand at 10 yr note auction. 2s vs. 10s flatter by 9bps to 239bps.
-Before auction 10 yr note was +0-12, after auction price rose to 1-09 to a yield of 3.30% from 3.46% earlier in the session.
-2 yr note yield falls 5 bps to 0.91%.
-Volume in 10yr note is above average. I show over 800,000 10 yr contracts traded. 162,000 so far today
-Overnight TSYs were victim to profit taking. 10 yr rose to 3.38%. Currently 3.35%
-10 yr techs bullish, but we remain hesitant of continued pace of rally while stocks look to confirm recent wave of pessimism/selling. Further weakness in stocks will add momentum to risk averse trade, which will further fuel bullish momentum in benchmark yields.
Stocks
-Equities bounced around a moderately wide range, however by days end not much progress was made in one direction or the other as traders appear to be awaiting earnings reports for confirmation of recent pessimism.
-Dow rose 0.18% to 8178
-S&P down 0.17% to 879. Financials down 1.71%.
-NASDAQ up 0.06% to 1747
-Futures on all three indices point towards higher open
In other news...
-Dollar got butt whipped by basket of currencies yesterday
-Corporate debt spreads wider ahead of earnings
-Oil prices fell after inventory report indicated distillate stocks have risen to near 25-year high. NYMEX crude fell to $60.
-The price of Gold fell 1.59% to 908.60/ounce
-G8 says economy still fragile
- BoE will not extend quantitative easing program
Later today...
9AM Fed's Duke speaks at FDIC conference
10AM US Wholesale Inventories. Expecting -1.0% after previous read of -1.4%. Sales expected in at 0.0%
10AM Joint Economic Committee holds hearing on Systematic Threat of Commercial Real Estate
1PM 30 yr Treasury bond auction. 11bn to be sold.
130PM Fed's Kohn speaks on Federal Reserve independence before House Financial Services Committee
230PM Fed's Stern speaks on financial crisis
3PM FN/FG 30 yr MBS coupon closes July trading
2s vs. 5s: 135bps
2s vs. 10s : 244bps
2s vs. 30s: 333bps
5s vs. 10s: 110bps