MBS MORNING: "Wait and See" Mode Again
Choppy price action in the stock market has capped momentum in the rates market this morning. The S&P is currently flat which has put fixed income traders in "wait and see" mode...
Unfortunately...during periods of sideways range trading, market participants will be drawn towards testing the nearest resistance/support levels, which is indeed occurring this morning. Indecisive equity market behavior and the extent to which the yield curve rallied yesterday has put the market in a bias that leans towards testing support levels...which, combined with some profit taking, is why prices are lower.
Although the 10 yr note yield is slightly higher, yesterdays rally is still intact as yields remain in a comfortable range. Illustrating this sentiment is a spike in volume (trader interest) as 10 yr futures prices approach morning lows. This implies market participants are looking to do some bargain buying while prices are relative cheap. Of particular note...that 830AM spike in volume corresponds with a block tradeof 5000 contracts.
117-05/06 or 3.55% should serve as strong support in the event of continued TSY selling. Going a little deeper, 117-12/13 or 3.52% should serve as a pivot point for traders looking for signs of supply/demand to come. Breaking 3.52 should send the 10 yr yield to 3.55. Beyond that...WE WILL ALERT!
During this "wait and see" poking and prodding period...the MBS market will likely remain quiet. Originators have been modest sellers this morning...we've seen just under a $1bn on bid lists. A few banks have jumped in as buyers as the FN45 approaches 100-00, beyond that the Federal Reserve has been the only other noticeable participant. Overall, MBS trading flows are apathetic...prices are currently taking their directional guidance from the gyrations of the yield curve. Interest rate volatility is flat from yesterday btw...
So far this morning 100-00 has served as strong support. PARNERTIA !
Slow trading flows in the secondary mortgage market are not stopping some lenders from passing through a few more bps onto rate sheets this morning. We have noted several sheets with improved YSP (base price + servicing)this morning...there are however a few others who have worsened. For now we are listening into Bernanke with the rest of the market...wait and see
2s vs. 5s: 145bps
2s vs. 10s: 259bps
5s vs. 10s: 114bps