MBS LUNCH: Oh No Stocks Are Rallying!!!
OH NO...stocks are rallying!!!!!
On the day, the financial heavy S&P is up 1.75% at 895. Notice the volume "spike" when the S&P broke 885 and 888 resistance levels. The reason I used " " around spike is because even though volume did move a bit higher when the S&P broke resistance, volume is still low overall...signalling a lack of strength in the rally. Reminder:financials are leading the S&P higher...how are banks going to make money in the future????
Since stocks are trading higher on the day you would expect Treasuries and MBS to be selling off right?
Nope. Not Happening.
Pretty stable interest rate environment (Vols 3 bps higher though)...volume is light in the 10 yr sector as I show 375K 10 yr contracts traded so far today. This stability would imply that fixed income is skeptical of the rally in equities....
The tight trading range in the 10 yr continues to hold.
Same thing goes for "rate sheet influential" MBS coupons. Volume is yaaaawwwwn..low as mortgages continue to take their directional leadership from range bound benchmark big brothers (see above). Market participants are still more interested in "up in coupon". The only real expected activity in our end of the stack (current coupon MBS) is supply dumps from lenders looking to lock up the rate commitments they have/will make to borrowers....which are likely behind us already.
Looking ahead...while Treasuries rallied on Friday, "rate sheet influential" MBS coupons failed to keep up with their benchmarks...meaning MBS/TSY YIELD SPREADS GOT WIDER as MBS is awaiting further confirmation of the flight to safety/risk averse bias. That said, as originators appear to have done a decent amount of supply dumping already, wider yield spreads imply there is room for MBS to hold steady in the event of TSY profit taking (minimal today but dont be surprised to see some before earnings announcements!).
So, although MBS coupons dont have much room to rally further until TSY yields fall further, rate sheet influential MBS should be able to withstand marginal amounts of yield curve steepening (selling of benchmarks). That doesnt mean MBS WILL hold steady if TSYs sell off, it just means there is more likelihood that MBS can hold its range in the event of any TSY profit taking ahead of earnings releases. Make sense?
2s vs. 5s: 133bps
2s vs. 10s: 242bps
5s vs. 10s: 108bps
Oh btw...NYMEX Crude continues to illustrate the "wait and see" mentality that is currently moderating markets. Price havent moved over $60 or under $57 today..CLC is very range bound with strong support at $58. A move below that level would strengthen the bearish bias in oil.