Good Morning. Happy Monday.
I don't know what the weather was like this weekend where you live, but here in the DC/Baltimore metro area we finally had a change of pace from snow and ice: SUN! Every field was occupied with some sort of sporting event or recreational activity...mostly lacrosse where I live near Annapolis. After a good run and few hours of lax, I feel recharged and ready to go for a productive week ahead---I hope you do too. Here is a quote to get you motivated if you're dragging a bit:
"Even if you're on the right track, you'll get run over if you just sit there" -Oklahoma's favorite son, Will Rodgers
Ok. Wake up now. Time to get your purchase market campaign perfected.
The Week That Was....
The bond market spent the week chopping around a confined range in preparation for the all important monthly read on the health of the labor market: the EMPLOYMENT SITUATION REPORT. Thanks to economist forecasts and government warnings for wintry weather payrolls weakness (and a Fannie Mae tapebomb), the long end of the yield curve managed to outperform the short end. While intraday price chopatility and several reprices for the worse (and better) created the perception of a busily traded marketplace...overall attendance remained low ahead of Friday's NFP print.
When the big day came most of us were surprised to see that foul weather had not made a noticeable impression on payrolls as only 36,000 jobs were lost in February. When accounting for positive revisions made to December data...only 1,000 jobs have been lost over the past three months!
The reaction in rates markets: after spending most of the week testing the most aggressive levels of 2010, flight to safety positions (and new flatteners) were unwound and benchmark yields quickly ticked up 6bps. BUY THE RUMOR, SELL THE NEWS seemed like an appropriate explanation...but the rumor was wrong and the news was much better than expected...so BUY THE RUMOR, SELL THE RUMOR might be a better description. While benchmark 10s ended the week higher in yield, "rate sheet influential" MBS prices managed to maintain status quo. MG described the outperformance of "rate sheet influential" MBS as a "Stunning Display of Courage Under Fire"
This is what we mean by "outperformace: TIGHTER YIELD SPREADS
The 3.625% coupon bearing 10 year Treasury note went out -0-21 at 99-16 yielding 3.685% on Friday...up 6.6bps on the week. The FN 4.0 was -0-13 at 98-07, 1/32 lower in price on the week. The FN 4.5 was -0-06 at 101-07, up 5/32 in price on the week (5pm vs. 5pm) and the secondary market current coupon went out at 4.297%, below the previous Friday close of 4.306% . By the way...while the rates market battled whispers of a hugely negative employment report, stock traders ignored the chatter and extended the recent recovery rally (in low volume):
The Week Ahead...
Besides some off the radar releases, the econ calendar is essentially empty this week. Retail Sales is the only data with the ability to have an intermediate term effect on the market. Besides that, we will be following ongoing discussions on who will fill the soon to be empty seat of Fed Vice-Chairman Donald Kohn, who announced his resignation in late February. Market participants are anxious to know whether or not an inflation hawk or inflation dove will be appointed to the Fed. READ MORE.
I recommend READING THE WEEK AHEAD post. Oh, there is one "event" I will keep quiet about for now. I refrain only to leave the door open for some trickery later in the week. MUHUHAHAHAHAHAHAAH (my evil-doer laugh).
With scheduled data at a minimum...rates traders will be left to price in concessions to the yield curve for this week's round of Treasury auctions. We get $40 billion 3s on Tuesday, $21 billion 10s on Wednesday, and $13 billion 30s on Thursday. With that in mind, after several failed attempts to break below the 50% retrace pivot, the 10 yr note is extending the move higher that began on Friday. Trading volume is low and the 2s/10s yield curve is 3 basis points steeper...
In regards to mortgages, as previously mentioned, "rate sheet influential" MBS coupons greatly outperformed their benchmark big brothers last week. In fact yield spreads tightened so much that we are nervous they will UNTIGHTEN a few basis points this week. This means there is limited room for mortgage-backed's valuations to hold at currently uber-rich yield spread valuations. If TSYs sell, the best we can really hope for is that "rate sheet influential" MBS yields play follow the leader instead of gapping out vs. TSYs. Do not confuse yield spreads with prices: READ THIS POST FOR MORE BACKGROUND
There is support to lean on against expected widening in MBS yields spreads though. While Freddie's delinquency buyouts are basically behind us, Fannie Mae's forced buyouts have yet to hit the tape. This puts pressure on traders to tread cautiously on FN "up in coupon" positions...which could fuel a "down in coupon" bid and help "rate sheet influential" MBS coupons maintain spread valuation stability. Adding to that sentiment are looming prepay reinvestments and monthly settlement (muhuhahaha hint hint).
This has been the case so far today as mortgages are lower in price but tighter in yield spread (theoretically its normal for current coupon MBS to tighten as TSY yields rise)
The FN 4.0 is-0-03 at 98-04 yielding 4.18% and the FN 4.5 is -0-03 at 101-03 yielding 4.379%. The secondary market current coupon is 4.309%. The secondary market current coupon is STILL TIGHTER vs. TSYs. Here is my scorecard: +59.3bps over the 10 yr TSY yield and +54.7bps over the 10 yr swap rate. Trading flows in the TBA MBS market have been slow so far...
My target pivot point is still 100-28
REPRICES FOR THE WORSE START IF THE FN 4.5 BREAKS DOWN BELOW 100-28.
REPRICES FOR THE BETTER AROUND 101-10
The dollar index is weaker, oil prices are more expensive, and stocks are up marginally.