MBS MORNING: Choppy Price Action in Slow Trading
Are stocks done rallying (for now)?
Overnight, S&P Futures made an attempt to move higher...but gains were unsustainable. After moving lower, futures spiked following a better than expected New Home Sales print (READ MORE), however the initial reaction failed to hold and prices moved lower...new intraday lows were made. More trades are being executed at bid prices rather than offer prices as sellers are making concession to attract buyers. Check out where traders are buying...see the volume spikes in the low 970 range? The fact that the market is not willing to accept higher prices implies traders may believe that valuations are too rich..given purely supply/demand market analysis...one has to believe that stocks will either go sideways in a range or move lower.
Weaker stocks are having postive implications for TSYs and MBS. As portfolio managers reallocate funds from higher yielding stocks to risk averse Treasury debt securities, benchmark TSY yields fall and MBS prices rise. Unfortunately, until stocks confirm a bias...TSYs and MBS may be subject to range trading....which means profit taking will moderate gains. Buying at lows, selling at highs.
Here is a chart of the 10 yr TSY Sept contract...notice activity pick up near price lows. Buy at lows!
Here's how it looks in yield...
In the MBS market, trading flows are quiet. This implies mortgage-backs will take their directional guidance from the gyrations of the yield curve...which is seeking leadership from the sentiments of stock traders all while looking to make some room for the $115bn in TSY notes that are scheduled to be auctioned this week.
As stocks move lower, expect longer dated TSY yields to fall which will lead "rate sheet influential" MBS prices higher. However, when stock prices rise, expect TSY yields to tick higher and MBS prices to fall. Furthermore fixed income traders will likely be a bit jumpy as supply to come will weigh on prices...this means some choppy price action may lie ahead for TSYs and MBS.
Here is the AM FN 4.5 chart illustrating the choppiness. Currently down 6/32 in price to 99.12....yielding 4.06%
Remember: trading flows are slow in MBS world. The up and down price action is a function of offer prices being adjusted to account for a flatter or steeper yield curve...choppy price action does not necessarily imply a trade has been executed.
Rate sheets are worse, but not as bad any one might have expected given the prices being offered in the secondary market.
2s vs. 5s: 155bps
2s vs. 10s: 269bps
5s vs. 10s: 113bps
S&P: -1.79 (-0.18%) at 97747
NYMEX Crude: 68.21
Dollar Index: 78.73
Gooooooold: 953.90