Much of our analysis this week has focused on the technical dynamics of range limits and the interconnected relationship between the market's perception of fundamentals and trader's ongoing short term profit churning positional tactics.
While some of the explanatory logic we have provided was mere exploratory reasoning based on the speculative maneuvering and strategery (been waiting to use that one) of performance driven traders, we have continued to rely upon the same concepts and indicators that have driven price action for the majority of 2009: the Federal Reserve's consistent presence in the agency MBS market and the bond market's ongoing independence and outperformance.
An unwavering reliance on these themes has served as a stable foundation with which we build our directional bias and timing guidance. I say this not to distract you from the headline driven perceptions of economic reality, but to remind you of the simple principles that are governing market trade flows: economic uncertainty is abundant, messages are mixed, and outlooks are muddled with assumptions based on assumptions.
Attempting to tie rational economic explanations to the reactive movements of the marketplaces will lead you into a maze of misconceptions and misunderstandings. While we enjoy addressing the underlying trends of economic data and events, their involvement in our analysis has been nothing more than anecdotal. Instead we have chosen a route that removes emotional effects and forces us to focus on the undying, ever-present foundation of our financial system: CAPITALISM.
Regardless of the uncertain economic environment...TRADERS ARE STILL TRADING.FOR PROFIT!!! So, with that in mind, I offer up a reminder of the underlying explanation of the random range bound price action we have witnessed since late spring.
Plain and Simple: IT'S A TRADER'S WORLD AND WE'RE JUST LIVING IN IT!
This is again obvious this morning as the 10yr note continues to carve out choppy price channels. 3.31%, where many a trader is short 120-00 calls in the the Dec 10yr futures contract, is strong resistance and 3.37%, where many short position was covered and new positions reopened earlier in the week, is strong support. The range is your friend.
Here is a longer term look at the 10yr note, not much time spent below 3.30% since mid-summer. 3.32% is a highly trafficked, seldom broken pivot point. We must continue to respect it.
While our benchmarks have bounced around this six basis point range all week..." rate sheet influential" MBS coupon price improvements have stalled and gone sideways as the MBS spread tightener (MBS outperformance of TSYs) we enjoyed over the past two weeks finally lost momentum.
The supply/demand (lack of loan supply) dynamics, which recently brought MBS
valuations to rich(er) levels, was balanced out this week as originators
locked in aggressive rebate and consumers took advantage of six month
low mortgage rates. While momentum has stalled in MBS price
appreciations, spread levels remain rich...prime for profit taking. I
state these counterbalancing observations not to scare or alert you,
but to re-affirm the concept of the range within the MBS market. A price ceiling has been hit in "rate sheet influential" MBS prices and a floor is being tested in mortgage rates.
The FN 4.0 is currently +0-02 at 99-11 yielding 4.072% and the FN 4.5 is +0-03 at 101-25 yielding 4.282%. The secondary market current coupon is 4.125%. The CC is 78/10yr TSY and 66/10yr swap and mortgage rates are holding near six month lows.
Sure, benchmark rates COULD move lower, but MBS prices are topped out and yield spreads are too rich to see lenders giving back much more rate sheet rebate. Lock 'em if you got 'em.