MBS MORNING: Risk Aversion Rallies Yield Curve
Good Morning...
The S&P is showing further signs that traders are unwilling to accept higher stock prices. Since most readers are looking for a logical reason behind why stocks are failing to rally following much better than expected HOUSING DATA...its because the housing data many absorbed was the seasonally UNadjusted data. The seasonally adjusted S&P/Case Shiller print revealed that both the 10 and 20 City composites fell 0.2%.
There are still several positives one can take from this data though...
1. Still better than economists had forecast (-0.5%)
2. Improved from the April read of -1.0% and -0.8% (10 and 20 city respectively)....
3. Lowest rate of decline since February 2007
There are negatives too...
1. Seasonal adjusted data still indicates falling home prices.
2. When the housing market begins to recover, homeowners who have been waiting to sell their home, may put their house on the market...ADDING MORE SUPPLY!
Anyway....that data combined with worse than expected consumer confidence was enough to push exhausted stock indices back towards the bottom half of the range. That's the best I can do in terms of fundamentals.
Reminder: although we have been discussing econ data for BIG PICTURE analysis purposes, we havent given market fundamentals much attention when monitoring market technicals for clues of interest rates to come. ITS' A TRADER'S WORLD, WE'RE JUST LIVING IN IT!!!!!
:-D
That said...stocks continue to show signs of contracting confidence as momentum has been and continues to moderate. Unfortunately for rates watchers, traders with bullish open positions are keeping equities range bound, WAITING FOR GUIDANCE....buying on weakness, hoping for continuation. So until further guidance is offered up that overwhelms optimistic traders...stocks should remain RANGE BOUND. For the sake of a rally in TSYs and MBS...hope that guidance is negative.
As stocks show further signs of fading strength...risk averse allocations are rallying TSYs and the yield curve is flattening. So far this morning the 10 yr TSY note is +23/32 yielding 3.64%. The 3.65/3.66 level has proven firm resistance over the past few sessions. A break below these levels would signal.........NOTHING. Dont get complacent until stock traders make up their mind on where the freight train is headed (stocks up or down).
3.55 corresponds to key technical price resistance in futures contracts as well. Check it out...116-15 = FIRM resistance. Further weakness in stocks would help us break 116-15 and test 116-30 or 3.59%.
Although a rally has ensued on the long end of the yield curve and prices "rate sheet influential" MBS coupons are moving higher....activity in the MBS market remains muted. Minimal originator offerings are being easily eaten up by official Fed buyers.However, as prices tick higher we would expect to see activity perk up as originators look to sell their supply of loans in an effort to lock in pipeline profits.
The FN 4.5 is up 15/32 and the FN 5.0 is up 10/32. This warrants reprices for the better. If you are floating...dont get greedy with gains until we start telling you that stocks are in overbought "correction" phase. That doesnt mean lock now....wait it out for reprices.
Here is the rally...
The current risk averse sentiment should bode well for 2 yr note auction. Tune in for auction results at 1pm.
2s vs. 5s: 150bps
2s vs. 10s: 262bps
5s vs. 10s: 112bps