MBS LUNCH: Another Choppy Morning. Gains Holding For Now
The dust is still settling but stocks are showing some skittishness ahead of pending labor market data (jobless claims and NFP). This morning we saw side equity-siders taking profits, pushing the S&P below 1,000...following the push below 1,000 short covering pushed the index higher.
If you have been keeping up with the blog we've been discussing the concept of range trading and referring to STATUS QUO" quite a bit. This concept applies once again this morning. In the futures market, the 10 yr Sept contract has found familiar territory in the 116-13 range. Notice we overshot retracement levels when we rallied...this reflects added steam a round of short covering as prices ticked off of recent lows...pushing the 10yr contract as high as the 200 hour moving average (RED LINE) where firm resistance was met...not the first time the 200 hour moving average has stalled a rally (red circles).
Illustrating the return to "STATUS QUO" with cash market yield...3.65%
In mortgage world, the "rate sheet influential" FN 4.5 has recovered early morning losses and rallied back up to yesterdays price range. Although prices have ticked higher, MBS have been outperformed by benchmarks this morning (wider static yield spreads). Option Adjusted Spread levels are not a topic we normally discuss...however I will say that tight OAS levels were a reason MBS were unable to keep up with benchmark big brothers and swaps. Actual buying and selling has been sluggish so far with the majority of activity in the "up in coupon" trade (not "rate sheet influential"). Other than that...originators have offered up minimal supply and servicers appear to be adequately hedged for now (using swaps). We may see real money accounts doing bargain buying as prices stabilize...but we would expect PARNERTIA to keep gains in check until stocks provide clearer guidance.
Here is the longer term perspective that we have been discussing recently.Though technical studies tend to be more relevent to a benchmark product such as treasuries, treasury futures, or stocks...past technical forays into certain spread products such as MBS have yielded "great success" (Borat Voice) under certain conditions. Considering the themes of uncertainty, range-trading, and the bull vs. bear recovery debate, a triangle that is homing in on PARNERTIA seems appropriate...
With today's data behind and stocks acting a bit nervous ahead of jobs data...MBS and TSYs will likely be taking directional guidance from the stock lever for the rest of the day. Although we wouldnt expect to see long positions exited, we might see further short covering if the market appears ready and willing to hold near 1,000 mark into the all important NON FARM PAYROLLS print. The concept o RANGE BOUND and STATUS QUO should not be forgotten when considering whether or not to lock or float....until we get confirmation of a flip in stock sentiment...we will continue to state that...FLOATING REMAINS SUPER RISKY.
That said...the volatility in the marketplace creates an opportunity to pick up a few extra bps. Just remember: regardless of MBS prices, lenders have not been willing to push rates too far below 5.00% (4.875% at most). Although we are heading towards an inflection point in the marketplace....do not get greedy with gains!!! RANGE TRADE YOUR RATE SHEETS...lock when prices are at the topside of the range!
In regards to the inflection point and market fundamentals...
For the past few months its been a TRADER'S WORLD, WE'RE JUST LIVING IN IT!!!! But things could be changing as summer comes to an end...
If you are going to focus on fundamentals think of it this way. From October 08 to March 09 equity markets priced in the possibility of systematic failure and depression....since hitting March equity lows, economic data has implied that the "worst case" scenario" had been avoided and a stabilization was indeed occurring.
More recently, this theme has been seemingly confirmed...because of this the market has returned equity indices back to where they were in late Sept. 08...STATUS QUO. Which implies the previous month's price action was nothing more than the end of a corrective rally.Going forward markets should more closely examine the extent to which they have priced in a "correction" and consider whether or not companies will be able to generate stable revenues while the labor market is weak and consumers are attempting to recover lost wealth.
Plain and Simple: previous equity market price action does not necessarily illustrate forward looking optimism...more than anything it implies a return to status quo. That said..we should start to see market participants looking ahead and attempting to place a present value on future cash flows. Unfortunately that task with be muddled with unknowns as the economic outlook has several volatile variables...expect trading to reflect that sentiment. Expect volatility to continue to govern the marketplace.
PS..In regards to TBW. If your choice of lenders is limited...so long to manufactured home deals. Expect to see a bigger fallout than just FHA deals...many third party lenders will shut off TBW products completely. Lastly...a closed deal does not equal a funded deal. Enough said.