The Treasury Department has released the details of next week's mini-refunding (auctions)...we get $35bn new 3 yr notes on Tuesday, $19bn 10s on Wednesday, and $11bn in 30s on Thursday.... for a grand total of $65bn in debt supply next week. This is inline with the market's expectations....compared to the previous 3/10/30 cycle, only 10s increased in auction size (by $1bn). 3s and 30s auction amounts are unchanged from last auction.
Following the 11am release of the mini-refunding announcement the yield on the benchmark 10 yr TSY note rose from 3.63% to 3.66% and while 2 yr notes barely budged."Rate sheet influential" MBS coupons are...yes you guessed...still at the mercy of the gyrations of the yield curve!!! Unfortunately this has not worked out well for mortgage rates this morning... as TSY are selling off big time and MBS are following the leader.
Originator MBS supply is said to be light and servicers are relatively quiet (these are your regular "rate sheet influential" MBS coupon buyers)...light supply is allowing bargain buyers to take advantage of discount (as in "out of the money" <100-00) MBS coupons. This is illustrated by the fact that yield spreads are tightening. This "bargain buying" is a function of the market's speculative theory that the Federal Reserve will intermediate in financial markets to ensure their initiatives are able to be carried out.
Looking at the chart you can see that the FN 4.5 has outperformed the 10 yr TSY note today. If TSYs start to rally (betting they will before end of day) MBS may lag a bit because of the perception of relative richness (+90/10yr is when we start to see MBS weakness/selling). This is not a bad thing, as a TSY rally would still result in a price rally in current coupon MBS...it just may not be to the same extent as TSYs because MBS have already had a mini rally (spread wise) this morning (tighter yield spreads).
Plain and Simple: Tightening yield spreads into benchmark rates sell offs indicates SOMEONE THINKS MBS WILL IMPROVE!
Since MBS coupons are taking their directional guidance from benchmark TSY notes...here is a chart of the 10yr notes recent range. The previously discussed "range" that is supposed to be moderating...has expanded a bit...nonetheless 3.70% remains a strong support level. (some weakness based on the fact that commodities rallying again...bad for implications for "cost-pull" inflation).
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Today's fixed income sell off is a function of yesterdays rally and a recovery in stocks...traders view this as an opportunity to take some profits and reposition...not much conviction in today's trade as tomorrow's data release still dominates major market participant positions. I cannot stress enough that these movements are short term...we are still waiting for new direction!!!
Yes MBS coupons are RED...but rate sheets have not been beat up as bad as one would have expected. Primary/Secondary spreads tighter (rate sheets not as bad as MBS)
MBS Market Alerts
