Good Morning.

Happy Dataless Friday!

I bumped into my Petro man this AM. These are the guys who fuel your furnace with heating oil. I took the opportunity to do a little "research" and asked him how he's been treated by customers lately. He was quick to respond. BAD. He's been getting heckled quite a bit lately apparently. Poor guy.

Don't shoot the messenger!

Just goes to show you how tight the fiscal situation is on Main Street. The margin squeeze is on. Anyway there's an update on my "misery index".

The econ calendar is empty today. Besides earnings releases, the only other notable event on the market's honey do list is a Fed open market operation at 10:15. The Fed's trading desk will lift an estimated $7-9 billion in Treasuries maturing between 2/15/2018 and 11/15/2020. These are "rate sheet influential" Treasuries. And yes...I meant to say "lift".

Investors are also focused on more Q4 earnings, which today included the much loved mega-Bank of America. Here is a uick recap from Reuters....

(Reuters) - Bank of America Corp, the largest U.S. bank by assets, reported a second straight quarterly loss, driven by writedowns in the value of its mortgage business.

The loss highlights the mixed results of the two largest bets the bank's former chief executive, Kenneth Lewis, made at the height of the financial crisis in 2008 -- the purchase of Countrywide Financial Inc and Merrill Lynch & Co.  The purchase of the subprime mortgage giant Countrywide continues to saddle Bank of America with mortgage woes. In the fourth quarter, the bank recognized a $2 billion writedown in value of its mortgage business, and a $4.1 billion provision for future mortgage repurchase claims. But Bank of America's global banking and markets unit, which includes Merrill Lynch's former investment bank operations, reported profit of $724 million.

READ MORE: BofA Settles GSE Buyback Requests for Pennies on the Dollar

Of course, on the street, analysts want to know if putback related costs are behind BoA. We covered that too. The answer is: NOT LIKELY. The loan buyback saga is far from over. FULL STORY

Stocks don't seem to mind though. S&P futures are up and bond prices are off a few ticks. Of course, when I said "Stocks don't seem to mind"...that assumed the market wasn't trading around technicals. Both stocks and bonds are acting exhausted with recent trends. Stocks can't seem to hold their gains while bond traders are getting bored with the range. Yesterday's benchmark sell off was a factor of fast money short selling and profit taking. This followed repeated failures at breaking the range. So, with rally motivation lacking, stored energy was released in the wrong direction this week.  Would I call it a major breakdown or huge shift in bias? No. I would call it boredom. The range held overnight. And continues to hold today. 

Why can't we break the range?

We explained on January 6th in this post...NFP Preview: Room to Run But Teetering on MBS Coupon Shift

Breaking out of the recent range would imply not only a shift in technical bias...but a shift in duration bias...a shift in the MBS production coupon...a shift in hedge ratios.  This requires a great deal of commitment from the bond market. It would require portfolio rearranging. It would require rebooted hedging strategies. It would require position squaring and an accumulation of longer dated debt. This goes both ways.

Plain and Simple: The bond market needs more motivation if it is to commit to a broad based shift in bias. Until then we keep playing the range.

Yesterday 10s broke a band of support between 3.40 and 3.42%. We thought this move might lead to a retest of the cluster around 3.46-3.50%. It did. That's where we are today. Fast money sold 10s short yesterday. That means they'll need to cover, but in order to profit, prices will have to fall and yields will have to rise. The capitalistic nature of fast$ traders tells us they'll push it as far as they can before covering. We think this will happen when bargain hunting real money accounts defend the range at 3.50%. We hope they do so before then though...

As benchmark yields trade higher this morning, "rate sheet influential" MBS prices fall. Loan pricing will be worse today. If your lender was out early...they may recall given the steep price decline as seen on the chart below.

Production MBS coupons extended on Wednesday as traders adjusted their prepayment models to account for less payoffs (refinances), which lengthens MBS cash flows and pushes yields higher. This helped MBS stay relative stable vs. TSYs yesterday and that looks to be the case this morning as the secondary market current coupon is slightly tighter as benchmarks back up.

READ MORE ABOUT PREPAYMENT SPEEDS AND MORTGAGE RATES

The range we are watching is 3.30 to 3.50 in 10s with outlier attempts at 3.25 and 3.56% possible.  We are watching 10s because that market is much more transparent. MBS prices still dictate loan pricing, but benchmarks are a much better directional guidance giver.

PS. The stock level is in effect today. S&Ps are +10.25 at 1286.50