Good Morning All. Happy Friday.
The most recent version of FinReg Reform legislation took another step toward the 1930s yesterday. Our Senators, who we collectively voted into office, passed their adaptation of historic reform legislation intended to overhaul the financial services and banking sector. After a 59-39 vote in the Senate, debate now shifts over to the House of Representatives where another vote is expected once a Congressional spin can be put on the bill.............
I haven't read the legislation yet...it's like 1400 pages of text and I lost track of the last amendment added. When politics happen, for a better point of view I generally turn to expert sources of information and opinion...
“While we continue to support financial reform legislation that responsibly guards against systemic risk, protects investors and increases regulatory transparency and oversight of all markets, there are several provisions in the current legislation that would undermine the original goals for reform by creating unintended consequences that could have a negative impact on our economy.
On Monday we wrote.....
Flat Open For Rates. Don't Get Lulled To Sleep By Sideways Price Action: And then there's the whole financial reform thing where Senators introduce amendments one day and vote on them the next. It's a shame that what is likely to become wealth shifting financial reform is taking place in an election year. I can't even keep up with all the amending and voting. This is a highly sensitive subject to the business models of market makers and money managers...one has to wonder how the marketplace will react to misguided legislation.
Well we have seen a few moments of disconnect between Stocks and the Euro. U.S. politics are clearly playing a role in the markets.
But so are technical levels of support and resistance. Yesterday I looked for the S&P to retest the lows seen in the panic of the flash fumble on May 6. <----GOOD READ. Since 1150 failed to bring supply and demand back into status quo...I have been looking for bottom at 1050. If that breaks....well if that breaks we'd have to re-evaluate the underlying motivation of the move.
REMEMBER: Values and therefore price are always determined by supply and demand. And supply and demand are determined by rational behavior. And rational behavior generally trends in one direction or another for a period of time. The duration of trend is dependent upon the degree of certainty or uncertainty surrounding the underlying motivations for "rational" behavior.
FinReg Reform is playing a bigger role in this selloff than we think....
Whatever the rationale one chooses to lean on (politics or smart money quants), the aversion to risk and flight to safety trend (Bill Gross says flight to liquidity) has extended...benchmark interest rates are lower again this morning.
The 3.50% coupon bearing 10 year Treasury note is currently +0-15 at 102-28 yielding 3.162%. 5.5bps lower on the day. The 2s/10s curve is 4bps flatter at 264bps. Yields were even lower at the open.....
MBS trading volume was above average yesterday. TradeWeb reported almost $300bn in volume vs. the $250bn seen on Wednesday. Current coupon yield spreads closed wider vs. benchmarks as negative convexity once again weighed on MBS price levels (mortgage rates lagged Treasury yields). WHAT IS NEGATIVE CONVEXITY?
The FN 4.0 is +0-07 at 99-30. The FN 4.5 is +0-02 at 102-14. The secondary market current coupon is 6.1bps lower on the day at 4.013%. 3m10y bps vols are 6bps higher as traders buy downside price protection.
The FN 4.5 hit a price high of 102-22+ this morning, by my records the FN 4.5's highest print on record is 102-29. This is crazy. A longer timeline is needed to provide proper perspective...
Germany's parliament approved measures to contribute to the 750 billion emergency debt package. The Euro is slowly building the foundation for a come back...but nothing is confirmed. Short covering and profit taking have played a role in the bounce. (Although that can be considered a sign of trend reversal)
The Euro is doing better but LIBOR hasn't reacted yet. Bank offer rates moved higher again this morning.
Mortgage rates will however inch lower today. Does anyone think rising LIBOR rates will scare out some INDEX + MARGIN paying fencesitters???? Mini-refi boom? I do....if they qualify.
The stock lever is still heavily influencing the direction of interest rates. Is this the end of stock selling or the beginning of a bigger retracement?
Even if you're on the right track, you'll run over if you just sit there....
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