Recap of Friday

  • Post-auction selling carries over into Friday. TSY yields higher. MBS prices lower. Rate sheet rebate worse
  • 10 yr TSY trades between 3.24 and 3.40. Last quote at 3.38
  • Class A October TBA MBS Coupons (FN/FRE 30yr) start settlement process. We are now watching November MBS coupons READ MORE ON THE ROLL
  • November FN 4.5 opens at 101-09+, hits intraday high of 101-17 before progressively weakening into close. Ends session at 100-29.
  • Trade themes: much of the discussion centered around Ben Bernanke's speech from the previous night which was taken as an indication that the Federal Reserve would raise interest rates sooner than expected. We dont take his comments this way, instead we know that the market finds excuses to trade specific strategies. Think of it as the news follows the trade, not the trade follows the news. The yield curve should have flattened given this sentiment, however continued duration shedding (selling debt with longer cash flows)from the 30yr bond auction pushed the curve steeper. Now we await bargain buying or a follow through on selling.

So Far this Morning

  • SHANGHAI +1.44%, HANG SENG +0.79%, NIKKEI +0.60%, TOPIX +0.40%, CAC +0.02%, DAX -0.04%, FTSE +0.14%
  • Oil is trading near a one month high at $74.31 while Gold sets new record levels (not inflation adjusted) at $1,066/ounce. If you need to pay some bills, pawn your Mr.T starter kit.
  • The value of the dollar is in focus. I will let this chart speak for itself....

  • The dollar hasn't been this cheap since August 2008
  • The NYSE, NASDAQ, and AMEX were open yesterday. In VERY light trading volume, stocks made gains for the 6th consecutive session. Overnight, equity futures were modestly improved, but still off yesterday's highs. 1080 is a key technical resistance level.

  • After a bad bad end to last week, TSYs are recovering. Currently the UST10YR is +17/32 at 102-15 yielding 3.33%. Here are some pivot points to keep your eyes on....

  • The November FN 4.0 is trading +0-10 at 98-24 yielding 4.1307%. The November FN 4.5 is trading +0-09 at 101-06 yielding 4.3560%. The secondary market current coupon is 4.232%.
  • As the 10yr TSY tests the 3.33% yield level, look for the FN 4.5 to lose upward price momentum. If the 10yr cross through 3.33% and holds, rate sheet influential MBS coupons will have more room to rally.

Today's data calendar is light, thus look for "rate sheet influential" MBS coupons to play follow the leader with benchmark big brothers.

Yield spreads have been grinding tighter and tighter in recent weeks. Given the optimistic earnings environment and expected strength in stocks....WE ARE DEFENSIVE OF A BACK UP IN INTEREST RATES and some spread widening between TSYs and rate sheet influential MBS coupons (TSYs will outperform MBS). PLUS recent data has been mixed to slightly better than expected....bond yields did not reflect this sentiment last week, so the notion of a needed correction may add pressure on rates to move higher.

One trade that remains on our radar is the Fed exit strategy/inflation trade. This topic generally leads to a flatter yield curve as market participants place bets that the Fed will raise overnight lending rates. Remember: a flatter yield curve is achieved one of two ways. 1. short term yields rise faster than long term yields (bear flattener) 2. long term yields fall faster than short term yields (bull flattener).

The release of the FOMC minutes on Wednesday will provide insight into the Fed's perspective on this topic. The Fed's verbiage and the events occurring in related markets will play a role in the trade that leads into and follows the release of the FOMC minutes...either way the market will be closely examining the Fed's exit strategy discussion.  The fact that there is no supply or supply announcements this week is helpful. Plus, on Thursday we get a read on inflation which is expected to have moderated in September. This report may prohibit the momentum of bear flattener trades that push long term yields higher and consequently result in higher mortgage rates.

Adding a bit of pessimism to the trade strategies of equity buyers is the retail sales report. The health of the consumer and their involvement in the recovery are an ongoing debate amongst economists. We feel in general, tight lending standards are prohibiting home owners from tapping into home equity and therefore adding constraints to household balance sheets. On top of that jobs are not being created and firms are still cutting costs via layoffs...this is expected to keep spending subdued as consumers de-leverage and prepare their finances for tough times ahead.

All that said, barring any tapebombs, the RANGE TRADE is likely to persist this week as no BIG PICTURE progress is made....but we will keep our fingers crossed for a little help from the stock lever. (is it bad to wish bad things for stocks?)

MBS, TSY, LIBOR QUOTES