Recap of Yesterday

  • Bernanke speaks in New York. Much of the same....cautiously optimistic. Nervous about tight credit conditions and lack of bank lending, unemployment. I think he was dovish...no reason to believe the Fed is planning on hiking rates anytime soon. READ MORE
  • Retail sales rebounded from 2.3% decline in  September to 1.4% gain in October. Car sales boost overall number...ex-autos retail sales up +0.2%, lower than last month's read of +0.4%.
  • NY Fed manufacturing index fell to 23.1  vs. 34.57 in October. Decline in new orders, prices paid,  and employment drag down overall index
  • Business inventories fell 0.4% to $1.3 billion. Manufacturing inventories 1.36% lower, sales up 0.8%.  Retailer's inventory increased 1.42% and sales fell 2.6%. Note the disparity...
  • Federal Reserve approves rule requiring notice be given to consumers when their loan has been sold or transferred. To be honest...I thought this was rule already. GOODBYE LETTER? READ MORE

The long end of the yield curve has recovered two weeks of steepening in the past two days. The 2s/10s curve flattened from the mid-260s to 256bps.

Some like to point towards Bernanke's continued cautious optimism as a reason for added strength in bonds...read as CAUTIOUS optimism, not cautious OPTIMISM, meaning the market is concerned that Ben is being so hesitant. While we took Bernanke's speech to imply the Fed will remain on hold for an EXTENDED PERIOD, yesterday's rally was a function of an unwinding of the "steepener" trade we've talked about so often.

In 10s, buying beget more buying as open short positions were forced to cover as prices rallied (options expiration coming on Friday). If open long positions can continue to push prices higher, buying will continue to snowball and it will appear that the rates market is super hot, dont confuse FORCED short covering with speculative position adding.  On the other hand, if sellers take over ...selling will beget more selling as open short positions push prices back into the money before Friday's option expiration.

Plain and Simple: price action may cover a lot of ground over the next few days...chopatility expected.

In the mortgage market, in the 3pm hour yesterday I informed you that origination supply had been slow all day. Well...soon after that supply picked up considerably...which resulted in lower "rate sheet influential" MBS prices and wider MBS/TSY yield spreads (negative convexity at work).

The FN 4.0 closed at 99-16 yielding 4.056% while the FN 4.5 ended the session trading at 101-28 yielding 4.271%. The secondary market current coupon was 4.099%. The CC yield went out the door wider vs. benchmarks....CC +76/10yr TSY  and CC +67/10yr swap. Consequently a few lenders actually repriced for the worse following yesterday's late session supply dump/ Fisher comments on MBS spread widening. (NY Fed did not appreciate).

Here is a two day FN 4.5 chart illustrating yesterday's late afternoon weakness...

 

While locating yesterday's late day dip I am sure you noticed that prices are lower this morning.

Currently the FN 4.0 is -0-01 at 99-15 yielding 4.059% and the FN 4.5 is -0-01 at 101-27 yielding 4.275%. The secondary market current coupon is 4.102% and all of yesterday's late afternoon spread weakness has been mopped up. The CC is now +73/10yr TSY and +64/10yr swap....so the Fed and bargain buyers, who lately have been active buyers on ANY sign of weakness, were quick to correct the yield spread widening.

If your lender did not reprice for the worse yesterday afternoon, rate sheets will be worse. If your lender did reprice for the worse yesterday afternoon, pricing shouldnt change much. If your lender didnt reprice for the better or the worse yesterday, you are due a few extra bps. If your lender is managing their pipeline the way they should be...they will do whatever they want regardless of yesterday's reprices. :-D

I added the following at 10AM...

As previosuly explained, buying beget more buying yesterday as short positions were forced to cover as rates prices rallied. While this added momentum to the price appreciations, it also added a layer or base of support. Because several short positions were forced to cover...they now can play the current market however they choose. Notice how selling stopped out where yesterday's rally really gained steam? This illustrates where short positions covered and locates underlying position support .