MBS MORNING: Playing Follow the Leader in Light Volume
Hi.
With a lack of market moving econ data and settlement day looming, trading flows in MBS world are slow and volume is sluggish. That said "rate sheet influential" coupons are playing follow the leader with benchmark big brother TSYs. This just means the perceived rally is a function of traders updating hedge ratios and pricing tables as the yield curve gets crushed (flattens!)...not really any monumental demand for MBS out there today...any supply that has come to market has been easily absorbed by the Fed.
Currently the 10 yr TSY is up 35/32 and the FN 4.5 is near facemelting status (in terms of dollar price changes...not yield spread/relative value). As MBS prices tick higher we would expect lender bid lists to grow as originators will look to lock in pipeline profits at MBS price highs. Remember this is the good kind of MBS selling as it reduces interest rate risk from lender pipelines.
The 10 yr is at its lowest point since late May! Our bullish bias is strengthening as the recovery rally we discussed yesterday afternoon has ensued, however volume has been a bit lackluster today (460k 10 yr contracts traded so far) so we are still not willing to go into all out float mode. Although sentiment definitely favors fixed income, we are still defensive of overheated rallies....dont let your pipeline profits linger for too long! Take YSP while you can and reevaluate rate sheets consistently (better this AM).
Dont forget that there is more to rate sheet formulation than MBS market price movements. (SEE LETTER FROM TBW CHAIRMAN)...warehouse lines are scarce and funding is a big issue for pass through investors! Pipeline management remains a hindrence. GUTFLOP GUTFLOP GUTFLOP.
This morning I wrote on oil prices and the relevance to the economic outlook. NYMEX crude has failed to break $60 today, but isnt moving much lower either.
...and after a short term oversold recovery rally yesterday,the S&P has resumed its downward trend. The 882 neckline of the Head and Shoulders pattern has been broken, if the bearish indications from this pattern are correct then we would expect to see the S&P test 845, then 830. If some how, some way cash returns to the market and the risk averse feeling fades, a break over 910 would signal a bias reversal back to bullish, but we would need to see some volume and we just cant see it happening given current market conditions. Bank earnings will be key to that assumption...look for trading revenues to bolster balance sheets.
2s vs. 5s: 132bps
2s vs. 10s: 241bps
5s vs. 10s: 108bps