Good Morning.

I've had some great coaches in my lifetime...none better than my high school/juniors hockey skipper. Many of the messages he bestowed upon me have carried over from the locker room into my professional life. One of my favorites is the K.I.S.S principle.


This is incredibly relevant to the current market environment.

The econ calendar isn't providing much meaningful guidance at the moment. Stocks are still showing an unwavering inclination to do what they want, when then want. Politicians are counting votes, leaving some of the most important reform debates of our era at the mercy of party lines. Fiscal affairs abroad are falling victim to heavy scrutiny AND speculation. Overall, this doesn't paint a very clear BIG PICTURE perspective. Well actually it paints a perfectly unclear picture: Outlooks remain muddled  with uncertainty as forecasts are based on assumptions that are based on assumptions. To top it all off...I got robbed by a sweet old lady on a motorized cart and our pets heads are falling off!

While many rates watchers are seeking a fundamental explanation for the market's bias to push "rate sheet influential" benchmark yields higher, I do not have much concrete content to offer you. The Plain and Simple truth we have communicated time and time again continues to be our "rock to lean on". It's a trader's world and we're just living in it. Play the range until the range plays you.

In yesterday's MBS MORNING post I wrote the following: "more or less traders are allowing yields of all kinds to tick higher just because they can". The Treasury will offer $21 billion 10s today. With no real reason for rates to move lower...yields are once again on the rise...because there is room for them to rise within the range.

Below is a chart of the 10 year TSY note going back to December 21, 2009. I have chosen this as my foundation for Fibonacci retracement analysis (yellow). At the moment the 3.625% coupon bearing 10 yr TSY note is -0-08 at 99-03 yielding 3.733%.  Yesterday, thanks to a ton of corporate issuance and a few bond market friendly headlines, 10s tested resistance at the 3.68% pivot...which just so happens to be the 50% retracement of the Dec.21 sell off. Today, with an absence of "flight to quality" headlines....10s are taking the space that is being given and testing overhead support at the 38% retracement (3.734%). 

If we remove the noise associated with the year end lack of liquidity in late December and focus strictly on 2010 itself....we find that 10s have stuck to the confines of two ranges: 3.57 to 3.71 and 3.71 to 3.85.  3.71 just happens to be the exact mid-market pivot of those two ranges.  For the most part, we've been lucky to be in the bottom half of that range for most of the year.Now...with little on the calendar to stop traders from building in an auction concession...10s are taking the space that is available above.

My coach used to tell me one thing a defenseman, if you're carrying the puck and the other team is giving you room to skate, take it! Seems like the bond market is testing how much room lies above our heads at the moment. 10s find support at the 3.734 pivot (38% retracement). There is room for 10s to skate the puck...the question is how far will the market let it 10s skate?

MY POINT: The best lock advice I can offer at the moment is the same lock advice we've offered since June 2009---Play the Range Until the Range Plays You

If you are floating in the near term (as in the next two days), we do not see justifications for improvement in the next two days. If weakness persists past the auctions and 10s tick higher toward the outer limits of the 2010 range, we would be more willing to let the float boat test the strength of the range trade bias. Know what I am saying? Lock at the rebate highs, float at the rebate lows.

The FAN 4.0 is -0-08 at 97-27 yielding 4.206% and  the FN 4.5 is -0-06 at 100-26 yielding 4.412%. The secondary market current coupon is 4.35%. The CC is 61.1 basis points over the 10yr TSY note yield and 57.7 basis points over the 10 yr swap rate.

 Don't forget yesterday was Class A Notification Day. Hence THE DROP

Rate sheet rebate is worse today.