Boy did I pick a bad day to step away from the blog...lets recap.
The 10 yr TSY note barely broke through my previously "called" 3.62% resistance level...but it didn't stray too far before profits were consolidated and a move higher was made. As MG pointed out this AM...we have had a persistent rally in rates over the past 5 days...so it was time to take a step back and re-evaluate the extent to which yields have fallen....
I have to say the fall below 3.60% really surprised me....and based on the trade flows near those price points I wasn't the only person betting on a trend reversal near 3.62%. I say this because the 10 yr bounced off 3.62% twice. After the second failed attempt to break through, the 10 yr managed to finally rupture its resistance. Following the move lower the rally appeared to get some added "umph". Weird! Nah...what likely occurred is once the 10 yr broke through 3.62%, some speculative short positions decided that it was time to cut losses and cover...which added enough steam to lead the 10 yr note yield down to the intraday 3.58% low (on my screen). Immediately following the short-lived visit into the 3.50s....profit takers emerged and that's when some snowballing occurred....
For mortgaged-backs, the day began with "rate sheet influential" MBS coupons in full on facemelting rally mode. Yield spreads were tightening, servicers were buying current coupons, volume was finally showing some sign of life (its been slow lately), and overseas accounts were even joining in the buying spirit as the relentless rally persisted. Everything looked all "peachy keen" (my grandma says that)...
BUT...we were due for a trend reversal, which MG informed you of repeatedly this morning. High five Matt...any short-termers who heeded our advice that "the tide was turning" and jumped off the proverbial fence...you owe Matt a high five too! The term "snowballing" should bring back flashes of "Black Wednesday". Remember that day? Three/four reprices for the worse, panicking borrowers, dejected traders, closed lock desks, and a busy blog! Well today was not nearly as bad as "Black Wednesday"...but similar principles apply here....selling beget more selling, trading conditions quickly turned from jovial two way flows to just plain "illiquid" as flashbacks of $95 price handles exacerbated an exodus from "rate sheet influential" MBS coupons. Following the selloff in longer life MBS (not likely to refinance anytime soon), a round of repositioning and protective plays pushed Treasury yields higher as duration was once again....shunned! On the day reprices for the better were reported...then reprices for the worse. All in all...we ended the day no worse or no better.
The extent to which duration shedding occurred in MBS world today ( stinkin servicers and profit takers) is an illustration of why we remained optimistically defensive this week. The optimism arose from a lack of supply and an oversold yield curve which was likely to allow for some corrective flattening and an MBS rally (adding duration after massive shedding). Our defensive side was, however, not quick to overlook the degree to which the market panicked when servicers began hedging convexity by dumping current coupons/"rate sheet influential" MBS on "Black Wednesday".
We really hope you heard these points over the past 4 days and GUTFLOPPED accordingly. Just in case you didnt....here are a few points to consider for the days ahead. Tomorrow is Thursday, which means we get Jobless Claims data at 830. As labor market and housing data are seen to be one of the weakest portions of the perceived "recovery"...any releases regarding either will likely move whatever money isnt already on the sidelines. Leading Indicators and the Philly Fed Manufacturing Survey are scheduled to be released at 1000. Again...the market is testing the extent to which optimism has exuded itself in the stock market, so any data that is "worse than expected" or showing signs of weakness will likely lead to "a flight to safety" (into risk free benchmarks aka TREASURIES). Then at 11 the Treasury Department will tell us just how much more debt they will dump on us in the week ahead. This is important. If history holds, just like last week, benchmark TSY buyers will likely force the Treasury to "pay up" for their bid side support. This implies we may have seen the lows of the week in terms of mortgage rates and Treasury yields. Dont panic because the leash is short....the FOMC meeting is next week....right in the middle of the TSY auctions. So the extent to which traders allow yields to run up should be limited as anything can happen on Fed day (Wednesday)....perhaps a statement as such would help...
"Although a slight stabilization has been noted by the committee, economic conditions continue to deteriorate as further depreciation in the housing sector, a growing supply of homes on the market, and continued credit delinquencies (MORATORIUM = OVER) are likely to further erode household wealth putting added constraints on consumer spending (discretionary already weak) and the labor market. Furthermore, signs of deflation are beginning to be noticed in the early stages of the production cycle, therefore the committee reasserts its position that inflation remains a distant concern. The committee also reaffirms thats is range bound 0% to 0.25% monetary policy strategy is necessary to facilitate the reflation of credit within the banking system. The recovery process will be slow as growth is likely to stagnate over a drawn out period"
That would give fixed income markets a bit of a boost! Perhaps I should write the FOMC policy statements? Well maybe that was a bit scary. That said...until the two day FOMC meeting is over and the 2:15 statement is released....I would not be long TSYs, at least not at these yields. TSYs are overbought and fundamentals point towards higher rates. So we remain defensive as market participants are likely to sell into any strength, but optimistic as the looming FOMC meeting should moderate losses. Sounds like we go sideways until the market finds new leadership! Range trade away...
From a lenders point of view...the recent volatility is reminder of how fast market conditions can deteriorate...picture a crowd fleeing a burning building. Mortgage bankers and pipeline managers will likely use whatever cushion they have built up over the past few days to moderate MBS losses and allow mortgage rates to move sideways for the time being (just to stay competitive)....however I cannot stress this enough...volume will be light and trading conditions illiquid which can make for volatile swings in pricing...and multiple reprices for the worse.
Phew...thats enough.
PS....I have read through all 89 pages of Obama's regulatory reform...but we'll talk about it tomorrow because I'm sure you are pretty tired...and by you I mean me. Good night!
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