MBS MORNING: Defensive Rates Market Ahead of Supply
It has been yet another slow summer morning so far.
Profit taking in stocks carried over from Friday into this morning's session, however equity indices are bouncing off their morning lows, making their way back to flat on the day...
The selling sentiment in stocks and oversold nature of TSYs (white circle) has provided a boost to Treasury and MBS prices this morning, however activity in both the TSY and MBS markets remain muted. 243,000 September 10 yr contracts have been traded while flows in the MBS market are less than 50% the 30 day average.
TSY traders remain very DEFENSIVE of the behavior of stock markets. Fixed income rallies may not last long as market participants sell into strength (defensive) ahead of this week's TSY auctions. Although this bias will likely limit our upside gains, the pending FOMC meeting should serve to slow the pace of any sell offs. The concept of range bound should be stuck in your head at this point. Other than that....activity will remain slow as hibernation mode kicks in while the Fed is deliberating.
Here is the morning price action of the SEPT 10 yr contract...
Ill skip the technical spread product jargon this morning and tell you that prices of "rate sheet influential" MBS coupons have returned to pre-NFP levels. That is a positive for your rate sheets...theoretically at least. However, given the defensive tone of the rates market, I know my rate sheets would have few extra bps baked in just for good measure. From the 20 some odd rate sheets I have looked at this morning...although there are several lenders priced worse than Friday, most are less than 15bps outside Friday's morning range...while a minority portion are better. That said...with the FN 4.5 back to pre-NFP prices, you may see a few spotty reprices for the better, but dont get too excited I wouldnt expect anything monumental.
Here is the three day FN 4.5....
2s vs. 5s: 151bps
2s vs. 10s: 255bps
5s vs. 10s: 104bps