5.0's ticked up a bid after the book close, 4.5's ticked down.  the 10yr went sideways a mere 3/1000's off 3.5 even.  Likewise, 4.5's and 5.0's are both within a tick of 100-00 on 102-00 respectively.  Talk about technical gravity!

Nothing pressing at the moment that hasn't been discussed already today, but we may get back to you with some weekend content.  PLEASE REMEMBER!  Tomorrow = no trading = no blog!  With that, we'll leave you with the day's charts and wish you a safe and happy holiday weekend just in case we don't get back to you before the 4th...

After reaching an intraday high of 102-06, the FN 5.0 has moved back to its long standing resistance price level at 102-00. Meanwhile, the other "rate sheet influential" MBS coupon, the FN 4.5, which we are still not willing to award the current coupon title belt...is feeling the gravitational forces of "parnertia" pulling on prices.

As most market participants have cleaned their stations and left JV desks in charge....there isnt much reason to panic.  Nonetheless, as we are 6-8 ticks off price highs, some lenders may REPRICE FOR THE WORSE just to spite you.

2s vs. 10s: 250bps

MBS QUOTES

On a good note...Suntrust will take 125% DU REFI PLUS as of Sept. 1.

If anything, the extent to which spreads have blown up is a promising suggestion that value buying may help the rally continue.  Remember that when spreads are wider (blown out, higher, gappy, etc...), then MBS is more attractive relative to benchmarks such as tsy's and swaps.

Other than that, the rally has been fairly stable all day, even containing a nice bounce of this AM's uptrend line as seen on the chart.  Similarly, Tsy's are trending down, but are currently up against 3.47 which was the level they failed to break last time they dipped below 3.5.  At any rate, you might see some lenders passing on gains this afternoon, and at this point, those who were inclined to float into today have good indication to continue to do so unless you get some big gains passed on. 

Reason being: NFP sets a better tone for fixed income, and the previously mentioned spread situation.

The biggest risk we see to your rate sheets at the moment is a short covering rally in stocks and afternoon loss of liquidity in benchmark treasuries. 

---

2s vs. 10s:250bps

MBS QUOTES

Selling in the stock market has stalled at a key technical level....the 62% retracement of the 888 low that was hit on June 23. This is firm support, however given the shortened holiday work week, it is quite possible this price point collapses. If this floor is broken the S&P's next level of support is 888.

That said, since the stock lever appears to be playing a role in the gyrations of the yield curve...as selling in equities has stalled, the 10 yr note yield has run into resistance at 3.49/3.50. This yield range has proven strong resistance for the 10 yr note. If stocks do move lower and 10 yr trader test 3.48, and do not fail, the 10 yr note yield could test 3.45. However, the same factors limiting stocks, a long holiday weekend, will likely moderate gains for the 10 yr TSY note. Dont look for the 10 yr note yield to move too far past 3.48 (unless stocks really tank).

Now for MBS...

This morning some lenders have reportedly been locking in their loans on the MBS market. This is a function of "rate sheet influential" MBS coupons reaching their perceived price ceilings...the FN 4.5 cant seem to break 100-00 and the FN 5.0 venturing too far past 102-00. That said, loan officers and borrowers are enjoying the rally in "rate sheet influential" MBS coupons, unfortunately we may have seen the best prices of the day in "rate sheet influential" MBS coupons. This yield curve led rally has however allowed lenders to improve mortgage rates a few bps.

Here is a two day look at the FN 5.0....

The MBS trading environment remains defensive. Market participants still broadly prefer to avoid extension risk heavy "down in coupon" strategies as there are far better, shorter lived "up in coupon" positions that can be taken (minimal prepay risk in the mortgage market right now)...leaving the Federal Reserve alone to fight off originators and servicer selling. This is a function of high volatility in the trading environment, or more simply, the fact that the BIG PICTURE is still very unclear which is forcing investors to stay away from current coupon MBS. 

Let's expand...

When benchmark interest rates (TSYs) rise both the duration and expected life of "out of the money" (at par or below par) MBS coupons increase (longer life). The farther out of the money an MBS coupon is, the more it's duration and life will extend (can only extend so much though) because the borrowers backing the loans that make up the MBS have no reason to refinance if their interest rate is lower than prevailing current market rates.

Plain and Simple: MBS buyers dont want to be stuck in a fixed income investment that isn't keeping up with its benchmark (benchmark yields higher than MBS coupon yield)...if interest rates move higher this implies those MBS holders could be reinvesting their money in a higher yielding debt instrument...they could be earning more return/MORE CASH FLOWS!!!!  

Now lets apply the academic background knowledge to the current volatile/choppy interest rate environment. Remember Black Wednesday? Remember the crowd fleeing a burning building? Snowball selling? Traders do not want to put themselves in that position again. This is a function of the BIG PICTURE OUTLOOK  which remains a BIG MYSTERY. The BIG MYSTERY has brought about a higher amount of volatility in the marketplace (volatility in options market). More volatility implies the outlook for forward looking interest rates is wider,....meaning there are more unknowns as anything can happen!Well if the "unknowns" end up being fixed income negative and benchmark rates rise, the life of "rate sheet influential" MBS coupons grows longer and longer. The extending life of those MBS coupon cash flows is a scary thing to investors because it means they could stuck holding an MBS coupon that is under-performing the yields of current market risk free benchmarks (bc only the borrower can exercise the embedded call option in MBS)...which brings us full circle. Hence why we have seen panic-like selling of "rate sheet influential" MBS coupons every time Treasury yields start to rise.  Hence why MBS investors are hesitant to jump on the TSY rally bandwagon...hence wider MBS/TSY yield spreads! Hence why we have said there is little room for "rate sheet influential" MBS coupons to move much higher. Negative Convexity 101.

The Treasury Department has just announced the amount of TSY coupons they will auction off next week

3s, 10s, 30s are all unchanged from previous issuance. 35bn 3 yr notes. 19bn 10 yr notes, 11bn 30s.

The Treasury will also auction $8bn 10 yr TIPS

Following the release the 10 yr note ticked up to 3.5.

Looks like MBS gains are capped out today....

2s vs. 10s:250bps

MBS QUOTES

• June Payrolls -467,000 (consensus -363,000)
• Unemployment at 9.5% vs. consensus 9.6
• Avg. hrly earnings unchanged versus .1% gain consensus
• workweek down .1 hr to 33.0 hrs.  consensus was for no change
  
• April nfp revised down a bit from -504k to -519k

This should (SHOULD) pave the way for a green friday...  Just how green remains to be seen, but so far the 10yr is heading down to 3.5.  MBS should follow shortly...  Stay tuned...

7/1 EFFECTIVE FED FUNDS:   +0.02  to  0.20  from 0.22

LIBOR FIXINGS

O/N LIBOR:     +0.0006   to  0.2681  from  0.2675

1 MONTH:       -0.0019    to  0.3044  from  0.3063

3 MONTH:       -0.0100    to  0.5775  from  0.5875

6 MONTH:       -0.0125    to  1.0788  from  1.0912

1 YEAR:           -0.0138    to  1.5762  from  1.5900

2s vs. 10s: 250bps

MBS QUOTES

The positivity discussed in the last post stuck around through the "going out" close at 5pm with 4.5's and 5.0's gaining 6 and 5 ticks respectively.  For MBS, this was not only the highest point of the day, but within a few ticks of yesterday's high.  Tsy's also ended at the lowest yields of the day with the 10yr at 3.54, but in that arena, yesterday's lows at 3.47 were unattainable.

Things were fairly quiet as participants wait for the only substantial data points before next week.  Volume was only about 3/4 of the 30 day average.  We've discussed in the past how volatility takes a toll on rate-sheet-influencial MBS as uncertainty leads accounts away from duration.  Volatility tends to rise into month end and NFP with a traditional levelling and sometimes abatement after NFP.  Because of that phenomenon, NFP passing is one of the factors in the traditionally supportive week for MBS.  Keep in mind, that this "support" is from the trader's perspective, and so places more weight on the potential benefits for the spread situation.  As far as prices, which is what we care about more, we will continue to take cues from tsy's while fluctuating inside the recent spread trading range. 

In general, whatever is bad for equities is good for us on NFP day.  One of the reasons we keep harping on "DEFENSE!" is the fact that we've strung together a fairly solid winning streak over the past week and all good things must come to an end.  The next probable day for MBS price positivity comes on Wednesday when accounts receiving pass-through MBS will get their monthly raft of payments which are sometimes reinvested into MBS to the point that prices benefit.  It's not a given, but another factor in the positivity.  That creates a window of 3-4 days where recent gains could retrace a bit and the price levels currently seen as a bit rich could correct before further gains into the end of the supportive week.  From a "scheduling" standpoint, it makes sense, and is something to fear. 

Also to be feared is the degree to which the broader markets would welcome another big sign of the recovery gaining momentum.  Just as we are waiting for guidance, so are stocks.  So is everyone.  Will it be another leg down in the recession or will the dream stay alive (not my dream I can tell you!).  Anything in the 300k's, even if worse than expected, is likely to be seen as confirmation that the recovery is real.  The higher in the 300k range, the more pause might be given.  The problem is that with the -365k consensus, basically anything under 400k is likely NOT going to be good for MBS and tsy's.  In other words, a larger amount of the range of potential outcomes stands to be perceived as positive.  We have to get back into the 400k's for a Friday rally.  Even then, the headline payroll reading is not the only component.

The actual unemployment rate, which came in last month at 9.4% seems to matter more and more to investors the closer it gets to 10%.  Tomorrow's consensus is for 9.6%.  The last two months, however, it's packed on at least .4% from the previous reading.  So tomorrow's consensus would be a drastic slowing to that trend.  Wouldn't be good for MBS if that pans out as that could be a positive point investors latch onto even in the face of an uglier headline NFP.  Hitting 9.8% or higher would be good.  I think if we by some chance crack 10% (which I don't think the powers that be would allow to be printed just yet), that could work in our favor even if the headline is in the 300's.  But doesn't all of this seem a bit frustrating?  Just a few months ago an NFP print in the 300's would have sounded farcical.  What has the world come to?!  Your hope and mine is "hopefully not another brick in the wall of full-fledged recovery."  If tomorrow's NFP creates that sentiment, the current relatively low benchmark and MBS rates will likely seem very scary to Joe Q Investor.  Massive selling could ensue.

There are mitigating factors to be sure.  One of the best bets for tomorrow is the often overlooked "average work week" component of the report.  This is simple math really...  The lower the hrs in the average work week, the less money consumers are getting to pay their bills and spend money.  So even if the amount of people losing their jobs is slowing at the expected pace, a surprise decrease in average work week SHOULD lead investors--even if it takes them a few minutes or even hours to figure it out--to conclude things aren't as rosey as the headline reading.  Here's hoping for logic to prevail should this component indeed pare a tenth or two... it's forecast to be in line with the previous reading of 33.1 hrs.  33.0 hrs or less could help offset damange caused elsewhere in the report.

As far as what this means to your pipeline, hopefully decisions have been made already.  If you're past lock cut off for today, then there's not much else for tonight.  If you're not however, consider those same types of deals you wish you'd locked before the last sudden and massive selling spree.  I guarantee you if this market gets convincing enough guidance that all the promises of recovery are indeed being kept, the selling that follows could be ugly.  AGAIN!  We're not saying we expect this to happen, but rather, ANYTHING COULD HAPPEN, and to whatever extent tomorrow might be good, or sideways, it could also be really really bad.  NFP is the kind of report that can precipitate record moves if the right mix of data hits a market anxious for direction.  Normally however, that anxiety, if met with a mostly "as-expected" reading, serves to create a lot of volatility tomorrow that may even end up unchanged. 

The bottom line is--unlike the low points in mid-June--there is no clear upside or downside in our near future.  The 10yr is trading right around most economists' year end consensus and MBS are right in the low range of 2009's dream-like positivity.  If the economy's "bad dream" is shown to have some life yet tomorrow, our "good dream" might be rekindled.  If, on the other hand, the message is that "the nightmare is over," it may well be time for MBS to wake up to a reality that's not quite as perfect as the one to which we grew accustomed through May.  Or all this could be for naught and we could simply continue sleeping, waiting for something--either good or bad--to relieve the suspense.  Sweet Dreams...

2s vs.10s: 249bps

MBS QUOTES

6/30  EFFECTIVE FED FUNDS:   +0.05  to  0.17  from 0.22

LIBOR FIXINGS

O/N LIBOR:     -0.0100    to  0.2675  from  0.2775

1 MONTH:       -0.0025    to  0.3063   from  0.3088

3 MONTH:       -0.0075    to  0.5875   from  0.5950

6 MONTH:       -0.0200    to  1.0912   from  1.1113

1 YEAR:            -0.0163   to  1.5900   from  1.6063

After a relatively sidways early afternoon, MBS and tsy's are improved, both at their best levels of the day.

Again, almost all of the directionality today can be chalked up to a dress rehearsal before tomorrow's NFP and inception of a 3 day weekend.  Considering we only have 2 days of trading in the new quarter before a holiday weekend, there's also a fair amount of bets being made on how the new quarter will REALLY begin once next week rolls around. 

As we've said, prices are now much more reactive to significant data.  In the absence of data, they range-trade in technical patterns.  Tomorrow wouldn't be one of those "absent" days as many are looking for NFP to either confirm it's ridiculous jump into the 300's, or bounce back a bit into 400's or even higher.  Speculation on both sides of the coin is gather a lot of steam in the rumor mill, but the consensus seems to be a bearish surprise (aka over 400k).  In all liklihood, the tone set by NFP will dictate rate sheets tomorrow barring an unscheduled party-crasher.  I'd feel pretty good if we did hit 400k or more, but history has shown that even when the consensus might be aggressive, even coming close to it is bad news for MBS.  That notwithstanding, if the number is somewhere in the middle area of the range, the INTERPRETATION and ANALYSIS that follow have the potential to shift momentum away from the initial reaction. 

If you're seeing some reprices for the better this afternoon, and you probably are, take a look at how much was passed on.  The closer 5.0 is to PAR, the more you might consider hitting the safety switch on those sensitive deals.  We're nearing that sort of "gut feeling" space where we've had a nice stretch of relative positivity and it just "feels" like something might give.

On the other side of the coin, stocks are poised to close under 928 on the S and P, which has been a heady ceiling indeed.  If NFP stokes the fires of "Recession Phase 2," it could be right back into the clouds for MBS.  Whatever the case, make sure you are thorough in exhibiting the following attribute regarding your pipeline (I'm serious!  If for some crazy reason we print a very low NFP, the "recession is over" mentality could take hold and it could be a black Thursday):

For the record, the possibility of such horrible events IS NOT the same as us suggesting they will happen, merely that they could.  MBS is waiting for it's next guide...

2s vs 10s: 249bps

MBS QUOTES

Resistance abounds....

• Yesterday and today, the 5.0 encountered a floor around 101-17 to 101-18
• Thus far, 5.0's unable to crack a ceiling at 101-24 (1 tick up on the day at least!)
• 10UST wasn't willing to crack 3.6, despite numerous tries, but now appears to be facing resistance on the downside between 3.54 and 3.55
• The S&P (we're making a change on our default charts for reasons we may or may not discuss later), hasn't wanted to close above 928 and is currently trading RIGHT THERE.

Why all the "range" recently...?  Why all the technical patterns?

AQ alluded to it this AM with the notion of "seeking guidance."  That's it folks!  We have a little bit of an anti-climactic, post-traumatic stress identity crisis.  With the FOMC announcement and the epic battle for a 3% handle on the 10yr tsy behind us, everyone is asking: "what now?"  Indeed...

As we've said, data plays an ever more important role in such an environment.  This can be readily witnessed in the much-more-rapid-than-normal responses of MBS and Tsy prices to the AM economic reports.  But so far, there hasn't been an earth shattering revelation about the most important bond market considerations: extension risk and an economic recovery.  The two go hand in hand really as the increasing prospects for recovery also increase the fear of duration (extension risk).  Remember that when we're scared of holding duration, we dump the low coupon MBS and the long term tsy's.  Bad for rates... 

For once, it's really as simple as that...  There are the same old knives in the air...  How soon will the economy turn?  How rapid will the recovery be?  Have we overspent in terms of quantitative easing?  Will there be enough demand for all this tsy supply?  Will the government be able to stop pushing the bike and let 'ol Junior ride down the street on his own?  Yada yada yada...  And for those that might argue that I shouldn't just "yada yada" the future market moving uncertainties...  I just did.

It's time to hurry up and wait.  What does it mean for your pipeline and the lock/float outlook?  "Defensive" was a good word from AQ's morning post.  But 'defensive' doesn't necessarily mean pessimistic, simply "utter preparedness and understanding that prices could move down very quickly."  As mentioned by AQ, there's probably more immediate downside than upside if such a violent change were to occur--at least until we've had some time to consolidate our recent gains and let our team of economic bears go to town on the bulls.  I just hope our bears are up to the task.

The rates market is defensive as most markets are essentially trendless...randomly testing resistance and support levels...in search of NEW DIRECTION!!!

The S&P has moved above 928 this morning....look for this price point to prove hard to break.

Meanwhile the 10 yr yield has gyrated higher and lower in step with stocks...

WHY SO DEFENSIVE?

Downside risk greatly outweighs upside potential. Negative convexity 101.

At this point, the yield curve has rallied to the point where heading lower would require an "event" that provided a clearer picture of "WHAT NOW", an event that scared the herd into safer assets (TSYs). The release of Non-Farm Payrolls data tomorrow is the next high risk event. The market is basically in waiting mode (trendless), just itching for directional guidance from a data print. In the mean time traders are occupying their time by poking and prodding at technical price levels. This has resulted in a bit of choppy trading action and some added volatility. More volatility implies more unknowns...more unknowns implies an increased need to protect portfolios from a wider varitey of outcomes. When I say protect portfolio I mean hedge. Which is what we've witnessed over the past few days in the rates market...hedging against unknowns.

Check out what swap rates have done over the past week...the rates market is NERVOUS

Rising swap rates not totally indicative of mortgage related convexity hedge, there are other forces at work here..ie corporate rate lockers, but still illustrate the skittish sentiment.

Swap Spreads are getting wider too...

Fixed income traders are well aware that downside risk is much larger than the upside (in MBS world this is illustrated by the FN 4.5 not breaking 100-00. and the FN 5.0 not breaking 102-00, plus consistently widening yield spreads). Meaning there is far more room for yields to run to the upside compared to the room for a rally (that would push yields lower). Dont forget the analogy we use to describe the downside risk in MBS and TSYs....a panicked crowd fleeing a burning building. This implies the possibility of a massive selloff looms in fixed income world. We are waiting for guidance on that....

THAT SAID...dont freak out.

Technical indicators are still bullish, albeit slightly less bullish then they were last week. But the BIG PICTURE is unclear, the WHAT NOW question has many outcomes with each economic report shining a little more light on the outlook.

Longer term, I think I have made it quite clear that my outlook is for a long period of economic stagnation(duh?). Our economy is extremely weak as the labor market is no where near recovery, corporate revenue models need to be redefined and proven efficient, then new jobs need to be created. GO BACK TO SCHOOL!!! On top of all this...HOUSING remains a huge issue. (No need to further explain this either...we have done a decent job of pointing out all the inefficiences and roadblocks to recovery in housing).

Whats all this mean?

You tell me, we'll say markets remain range bound until the broad audience realizes that we have a very long and frustrating journey ahead.The question is: what in world is the range? Between 3.50 and 4.00 on the 10 yr???? Waiting for guidance...

I know I have given you essentially no indications of our short term outlook. If you are wondering whether to lock or float...short term TECHS are still bullish, but the rates market is super skittish ahead of the release of Non-Farm Payrolls. On top of that quarter end window dressing and month end index activities have left the street in mostly long TSY positions.  If we didnt have an "event" (NFP) ahead we would be much more disposed to direct towards locking as the overbought feeling in the long end of the curve was unwound...but we DO have an "event" looming...so we remain slightly bullish on lower rates, but EXTREMELY DEFENSIVE. Remember...crowd fleeing burning building! If jobs data is "not as weak as expected"...rates will move higher. If jobs data is as weak as expected or weaker...that will relieve some of the selling pressure we have dealt with in the past 24 hours.

Here is a two day chart of the FN 5.0...

For MBS specifically...seeing a mad rush "down in coupon" is not likely unless traders fear of prepayment risk intensifies. Low mortgage rates are not enough to spook these market participants though, we need some added assistance in the form of common sense underwriting and reduced risk based adjustments. We need some common sense in the home valuation process. We need lenders to lend! There are still too many overlays/protective roadblocks in place to ensure mortgage bankers dont lose their pants in mortgage world again. Can you blame them for being nervous about who they lend to? I cant...but I would at least like to see some common sense make its way back into the underwriting process

In regards to mortgage rates...the potential for higher rates means less fear of fallout risk/rate flip requests....but also adds a dimension of "qualification risk" and loss of borrower interest. Its all about pipeline managment at the moment.

That said...rate sheets are erratic. Some are noticeably better this morning...perhaps in an effort to lock up some loans before rates rise and borrowers lose interest, while others are worse as the competitive environment warrants no need to rush into any aggressive strategies. Lenders too are in...waiting mode. Reprice for the worse alerts remain a constant anxiety as any selloffs have the potential to snowball. You should be defensive too...always GUTFLOP.

2s vs. 10s: 249bps

MBS QUOTES

Yesterday's Recap

- Way down, then way up, then way down again ("way" as in just over 10 ticks, not as in a major sell-off)

- Stocks lost as well

- Investor confidence higher, consumer confidence lower

- Case Shiller out with "least bad" readings in recent memory, prompts first wave of selling

- last day of Q2

The AM So Far...

- Tsys and MBS opened a bit lower

- whipping around in early trade following ADP

- ADP showing 473k loss in private payrolls (keep in mind that value of ADP as a correlative indicator of Jobless Claims is always suspect, but markets react regardless)

- stock futures paring gains

- bottom in for MBS just below yesterday's lows?  Top in for 10yr Just below 3.6?

- Bloomberg points out bank stocks' fall of 23% Since May suggest selling on horizon in S & P full article...

- Fed's Yellen says rates could be near zero for years. Bets in futures markets on a rate increase as soon as late 2009 are "jumping the gun."  In a statement responding to the news, an anonymous source was quoted as saying: "Duh!"

- for MBS quotes updated every 30 min or less, don't forget:

- Can we get some Q309 tightening please?

THE RATES PAGE 

Charts

Quarter 2 has come to an end....

Here are some charts to illustrate the evolution of the marketplace in 2Q 2009:

LIBOR CURVE

AND LAST BUT NOT LEAST....

I think I adequately laid out "WHAT NOW" in MBS AFTERNOON

The Economic Calendar Tomorrow...

PS...I would have like to included a chart illustrating the evolution of mortgage rates, but I am not a fan of any of the surveys as they are not borrower specific and often times create borrower misconceptions.

FYI: Mortgage rates went up if you were wondering! :-D

2s vs. 10s: 241bps

MBS QUOTES

Hmmm...Treasury traders appear a bit skittish.

Why?

Look! Stocks ticked up off their lows and 10 yr traders panicked a bit....

The entire marketplace is in search of direction. Stocks have been range bound, essentially trendless capped by resistance, held together by support. The yield curve has flattened 40bps from a steepness of 280bps, as measured by 2s vs. 10s, since early June. Fundamentals are mixed as economic indicators tell a spotty story...some show signs of government funded growth while others are just beginning to slow their state of freefall...stabilization is occurring, but the market has no idea whats next!

Hence the range bound, trendless trading activity. So why are Treasury traders skittish today? Stocks are moving off their lows...the yield curve's recent rally has been quick, to the point where many believe a correction is due (monthly techs still bearish). If stocks have indeed found their lowpoint....then TSYs will see cash flow out of the yield curve...and traders wont fight the momentum! (Remember that whole "crowd fleeing a burning building" analogy?)

Plain and Simple: quarter end is behind us. TSY  window dressing positions can be unwound, but not before getting a better indication of "WHATS NEXT".

Do stocks move higher or does the stagnating labor market eat away at spending? Does  record affordability spark a summertime home buying spree or does housing drag the economy down? Does a flight to quality bid push yields lower or does the S&P test 1,000?

Couldnt tell you at the moment...but the after hours action indicates the street has an itchy trigger finger to shed duration in the event stocks start to rally (based on activity in options market). The market craves an answer to "WHATS NEXT!!!

Economic data and earnings will provide a glimpse into "WHATS NEXT"...for now the market sets up for Non Farm Payrolls: The Employment Situation Report. Thursday at 830AM.  Things should get volatile/choppy leading up to it....

The FN 5.0 didnt move much but is nonetheless lower on the day....101-27 support has become 101-27 resistance.

2s vs. 10s: 241bps

MBS QUOTES

Lets check out how ranges are holding up...

In stocks, strong resistance at 910 (62% retrace) is keeping losses in check for the S&P.

So it looks like stocks are range bound right? If you cant answer this...look at the above and below charts. See it?

Since it appears that the "stock lever" is providing leadership for the  gyrations of the yield curve today...check out what else is range bound! Equities move higher, TSY yields move higher. Stocks go lower, TSY yiels go lower. Stocks sideways, TSYs sideways.

Pivot points are price/yield levels that are generating more market activity. 3.48 has been a good pivot point lately. Support is holding strong near 3.50..."3.50nertia": not straying from there!

As long as benchmark's can remain range bound, "rate sheet influential MBS should too. (HOLD 101-27!!!)

The FN 5.0 continues to BANG BANG BANG against 102-00. BANG BANG BANG!!!

Real money buyers were indeed buyers are price lows...most other accounts have been muted though.

Today is the last trading day of the quarter...MBS books close at 3pm. That means Q3 starts at 3:01pm!!! Month end index buyers will likely enter into the market, PLUS yield spreads have been noticeable wider recently, so maybe we see some relative value bids give us a little nudge higher. We expecting/hoping for a little after hours action today! Dont get all excited though...the economic calendar, as in Non-farm payrolls on Thursday, is moderating upside and downside breakouts (RANGE BOUND!!!).

Tired of hearing me say that yet?

2s vs. 10s: 237bps

MBS QUOTES

I wonder if Wells gives back that AM reprice for the worse?

Remember that statement we made last week about economic data being in focus this week?

IT IS!

After a "less weaker than expected" (yeh its like that) S&P headline on home prices (READ STORY), stocks moved higher and the yield curve steepened as the 10 yr TSY note yield climbed 8 basis points to 3.58%. Consequently, as we alerted "rate sheet influential" MBS coupons weakened a few ticks price-wise. See chart on MBS ALERT.

Then at 10AM...Consumer Confidence was posted. Economists surveyed were expecting a print in the 55.0 area. Actual was 49.3. Worse than expected. At that point stocks sold off and the 10 yr TSY yield recovered  a few bps. BUT THEN....at 1015 the Federal Reserve conducted a scheduled open market operation (purchased TSYs from street)  and the 10 yr shed 7 of the 8 bps it lost following the "less weaker than expected" (haha) home price data. Currently the 10 yr note yield sits at 3.51%. Check out the action so far this AM...

Since the Fed's coupon pass (OMOs) activity in the TSY market has slowed down a bit. That said, barring any unexpected tapebombs, the last trading day of the quarter  will likely be a slow one (flows slowdown). Look for the yield curve to pace the activity of stock markets (inverse relationship) as whatever money is working is put to good use.  We watch the S&P....this morning, equity investors were testing the S&P's 200 day moving average, which failed thanks to Consumer Confidence. Here is the expected intraday range for the S&P. 928 Resistance. 910 Support.

Onto mortgage world now...ever notice how I usually wait til the end of my posts to discuss MBS? Why do you think that is?

Following the Consumer Confidence release the FN 5.0 began making its way back towards flat on the day. If TSYs keep on rallying (might be hard for 10 yr to break 3.50 given the S&P has found strong support near 910)...102-00 will still prove to be the nemisis of originators and borrowers looking for a reprice for the better from lenders. It just hasnt happend lately...

It appears the "rate sheet influential" MBS sell off was bad timing for lenders...based on what I have seen this morning rate sheets lost a chunk of YSP compared to yesterday. That said, since we have enjoyed a post-data stabilizing rally, there is some room for a reprice for the better if MBS prices hold, but dont get your hopes up...not much reason for lenders to go out on a limb today. That is unless you believe month end index buyers will be in the market looking to add duration to their portfolio.  MBS trading flows are two way and volume is looking to be on average so it appears that real money buyers jumped on the bargain bandwagon when MBS prices hit their AM lows. That buying will likely lead to the month end buyers joining in the fun by days end. So there is hope! But we're still not too optimistic about noticeably better rates today, especially with the S&P finding support at 910. Sorry...

2s vs. 10s: 239bps

MBS QUOTES

"Less weak" than expected data print + JV trading desk (light trading in the MBS market) =

Dear Range,

Moderate!

Yours Truly,

Rate Sheets