Prices of rate sheet influential MBS coupons have made modest gains this morning. GN's have been the weakest MBS coupon (vs. FNs/FREs) this AM as the usual (only) supportive FHA bidder, Asia, has not been especially interested in govie paper today. Trade flows are balanced at the moment but volume is quite light so liquidity could become an issue in the event of a intraday trend reversal/correction/range moderation (selloff).

Remember the FOMC meeting is a high risk event so many accounts will prefer to avoid day trading fluctuations as flow momentum will not be fought by market participants. Meaning...if TSYs rally and MBS rally too, there will be a slow and stable supportive bid for your rate sheet coupons (to keep up with TSYs). On the flip side if TSYs start to sell, MBS will too sell. The down side here is that as weakness gains momentum the market will not attempt to offset the rush of sellers and REPRICES FOR THE WORSE WILL LIKELY OCCUR.

Early in today's trading session, "down in coupon" buying interest intensified as the yield curve flattened and the FN 5.0 crossed over the previously pointed out 101-00 price level.  MBS/TSY yield spreads are a few ticks tighter in the rate sheet side of the stack (read above). Since hitting an early session high of 101-10, prices of the current coupon FN 5.0 have begun to slowly move lower (as the the 10 yr rally has stalled)....

This rally in MBS prices has been made possible by our directional guidance giver...the yield curve. As has been the case in the recent past, when TSYs sell off and the fixed income sector weakens, "rate sheet influential" MBS coupons have been significantly outperformed by comparable benchmarks...meaning yields spreads widen up as MBS investors flee current coupon mortgaged-backs (negative convexity) in droves. I refer to this as a panicked crowd fleeing a burning building. On the flip side, when TSYs improve, MBS buyers steadily return to the marketplace to take advantage of bargain dollar prices and cheap relative values (wide  yield spreads between TSYs and MBS).

In regards to the yield curve....the current trading environment is not indicative of things to the market's main focus is to keep status quo heading into the FOMC announcement at 2:15 on Wednesday. I really dislike using the term "neutral bias"...but in this case it absolutely applies here...perhaps I should say "no bias". This implies traders will allow the range to moderate their positions as most prefer to play the market's median FOMC expectations.That range is defined belo, as long as stocks remain weak dont look for much volatility outside of this range...which implies MBS may go sideways for the remainder of the day.

Again...MBS are highly directional with the yield curve barking marching orders. TSY prices higher...MBS prices higher (and yield spreads tighten). TSY prices lower...MBS prices lower (and yield spreads wider). All that volume is light and momentum will not be fought by market participants, so while we would expect MBS to move sideways (relatively vs. TSYs) for the remainder of the day you should still be in a constant state of ALERT AWARENES.


2s vs. 10s: 255bps


Investors have been a bit stingy with rate sheets this AM...