Recap of Yesterday

  • $29bn 7yr notes auctioned at high yield of 3.005%. Bid to Cover 2.79%. Indirects take 61.7%, Directs 6.2%
  • August Existing Home Sales -2.7% vs. +2.1% consensus. Annual Pace 5.1 million vs. 5.24 million prior
  • Jobless Claims 530,000 vs. 551,000 prior print. Continuing Claims 6.138 million vs. 6.261 million prior
  • Equities sell after weak housing data. S&P tests 1048, the 38% of most recent bullish cycle which started on Sept.3. Two consecutive days of stock selling (ondecent volume)
  • US Dollar stronger, Oil at cheapest level since mid-August, Gold falls from $1,018 intraday high all the way down to  $993
  • The stock lever was obvious influence in bond market yesterday. What's bad for stocks was good for bonds.
  • 10yr TSY rallied but failed to break recent range resistance at 3.37. Volume was strong. 830,000 10s traded.
  • "Rate sheet" MBS close near four month price high. FN 4.5 closes +0-10 at 100-30+
  • MBS yield spreads tighter vs.benchmark big brothers. MBS outperform TSYs
  • MBS Current Coupon: 4.326%
  • MBS trading flows still slow. Originator selling totals less than $2 billion. Servicers were buyers of rate sheet influential coupons. Money managers set up shorts for spread widening in future....anticipating a slowdown in Fed buying
  • Some lenders reprice for better in afternoon
  • Fed buys $23 billion MBS...brings total to $885...prepare for the slowdown of Fed buying

This chart is cool...30 yr coupons only. Is the Fed day trading the market now?

So far this AM

  • SHANGHAI -0.52%, HANG SENG -0.13%, NIKKEI -2.64%, DAX -0.65%, CAC -0.56%, FTSE +0.22%
  • Iran making Nuclear weapons...Obama not cool with it. We're not feeling so hot about that either!
  • Durable Goods -2.4% vs. consensus +0.50% and prior +5.10%
  • Durable Goods ex-defense -2.4% vs. consensus +0.7% and prior +4.50%
  • Durable Goods ex-transportation +0.0% vs. consensus +1.00% and prior +1.10%
  • This data has been all over the place...
  • Stock futures moved higher overnight but fell after data. TSY futures higher overnight lower after data...end result=sideways price action.This is function of THE RANGE MODERATING GAINS
  • 10yr yield bounced between 3.35 and 3.39

The FN 4.5 is currently +0-03 at 101-02 yielding 4.331%. 101-00 still serving as a psychological profit taking, bank selling resistance/PARNERTIA like price level...

READ MND's The Day Ahead

Yield Curve=FLATTER
2s/5s: 2bps flatter at 141 bps
2s/10s: 4bps flatter at 240 bps
5s/10s: 2bps flatter at 99 bps
5s/30s: 4bps flatter at 176 bps
10s/30s: 2bps flatter at 77 bps

WHY DO YOU CARE ABOUT THE SHAPE OF THE YIELD CURVE?

If the market thinks the Fed is going to raise rates, the short end of the yield curve will suffer, and the yield curve will flatten as spreads tighten (tighter: less bps between long term and short term TSY rates). However as the Fed reiterates record low rates policy, the short end will rally and the curve will steepen. Fluctuations in monetary policy outlooks create spread trading opportunities...the wider 2s/10s get, the cheaper it is to buy the long end of the curve...you could view this as bargain buying. We expect to see these strategies heavily influencing "rate sheet influential" MBS prices...

Plain and Simple: if 10s are rallying because they are cheap vs. 2s...MBS will benefit!

3M LIBOR -0.0006 at 0.2825 (wow thats low)

The dollar index is +0.06% after trading lower overnight. NYMEX Crude is -$0.40 at 65.49. Gold is lower at $989

Bullish momentum is building in the bond market...this supports the low side of the range. Waiting for a breakout, waiting for confirmation.

In the MBS market...is the Fed already slowing down the pace of their purchases? Probably...watching yield spreads and buying patterns (time to go short?)

MBS, TSY, LIBOR QUOTES