After the initial knee jerk reaction to better than expected
economic data, stocks rallied and the rates market sold off. However,
shortly after market's absorbed the data, the tide turned and stocks
reversed course which allowed the rates market to recover losses.
Whether or not the reaction to this data is indicative of a shift in
market sentiment is difficult to determine as many participants wont
return to their desks until after the Labor Day holiday. Adding
complications to forecasts is the release of Employment Data on Friday,
followed by a long Labor Day weekend. Although it may be a bit early to
be blaming a long weekend and looming influential econ release...we feel the
effects are noticeable via the market's choppiness.
Plain and Simple: No one wants to catch a falling knife, no wants to get caught on the wrong side of momentum.
However,
if we were attempting to form a mid-term outlook we might refer to the
old attage "buy the rumor sell the news" as an explanation of trading
flows. More than anything we are looking for the market to begin to
trade "against the herd". Meaning...if the majority of positions were
bullish...than a profiting opportunity would arise by
countering the broad bias or more simply put...by making more trader's
wrong than right. Something that big banks have the ability to do...follow the market makers.
Either way, after yesterday's move lower, stocks are showing
continued signs of weakness. The S&P, led lower by financials, has
broken 1,015 support and is now testing the 1,000 mark. A price level not seen since August 20...
Is this the beginnings of a correction?
It could be. It couuuld be....see holiday week explanation above though
In the rates market the influence of the stock lever is obvious. The
10 yr TSY note has also returned to levels not visited since August
20....Our target is 3.36% then 3.26%.
Meanwhile, rate sheet influential MBS coupons have chopped around in
a volatile manner. In a short time frame, related market action led MBS
prices to the lows of the day then to the highs of the day. Currently
the FN 4.5 is +0-05 at 100-20...off the intraday high price point.
When examining internal mortgage trade flows we note that the
Federal Reserve's buying powers have been focused " UP IN COUPON" this
morning....specifically 5.5 coupons.This is a bit baffling. The best
explanation we can offer is as follows....
As benchmark yields
fall and MBS rise into new price handles, real money accounts (banks,
insurance companies, pension funds, money managers) must adjust the
sensitivity of their portfolio to shifts in the yield curve. Today
these real money accounts are adding duration to their portfolio by
selling shorter (less) duration "UP IN COUPON" positions. This adjusts the
sensitivity of their assets to shifts in the yield curve to match the
sensitivity of their liabilities to shifts in the yield curve.
Remember:
these buyers are generally long term investors. As benchmark yields
fall and MBS prices rise...so too does prepayment risk.
By purchasing 5.5 coupons,the Fed is simply providing liquidity to the marketplace.
Looking Ahead...
Much
of this rates rally is being fueled by speculative
positioning...aka the effects of the stock lever. If stocks remain at
session lows for the rest of the day,
these MBS prices should hold. However, one hurdle arises with
increasing mortgage prices. As MBS prices tick higher, mortgage
originators will look to start locking in rates. Think of this as
mortgage bankers taking profits on their pipeline of loans. Although
this has yet to occur today...it is a lingering concern. (the weakness
would be illustrated via wider MBS/TSY yield spreads...something not as
noticeable to the originator community).
Plain and Simple: stock lever in effect
MBS, TSY, LIBOR QUOTES
PS...only a few reprices for better noted so far
PPS...re:speculative positioning. Servicers not buying rate sheet influential MBS yet....when servicers start buying it is not speculative, its a necessity. This would be a sign of acceptance...acceptance of current price levels. Good for mortgage rates...