Good Morning. Happy Monday.
After touching 4.00% one week ago today, the 3.625% coupon bearing 10 year TSY note is +0-01 at 97-30 yielding 3.879%.
Class A MBS coupons (FN/FRE 30s) started the monthly settlement process on Friday. HERE IS A POST DISCUSSING IT. It also explains why 60 day locks are more expensive than 30 day locks.
The FN 4.5 starts the week +0-04 at 99-26 yielding 4.529%. The secondary market current coupon is 4.528%. The CC yield is 65.4 basis points over the 10 yr TSY note yield and 67.8 basis points over the fixed leg of the 10yr interest rate swap.
REPRICES FOR THE BETTER CONSIDERED AS FN 4.5 APPROACHES 100-00
REPRICES FOR THE WORSE CONSIDERED AS FN 4.5 APPROACHES 99-16
A slow econ calendar combined with what seemed like a bearish tone from the FOMC meeting minutes and strong demand for an extremely cheap round of TSY debt issuance served to stabilize seller flows last week. This presented traders with an opportunity to test the waters of a rates recovery rally. While 10s failed to make it back into the 3.57 to 3.85%...it was encouraging to see bargain buyers act aggressively toward higher returns (yields).
The week ahead will offer plenty of chances for benchmark 10s to re-enter the range. The econ calendar is jam-packed and there is a plethora of Fed speak to help calm the market's Fed Funds rate hike anxiety. Treasury supply has probably peaked at this point. This should be confirmed later today when the Treasury Budget statement is released. If you're worried about the bond trader's biggest enemy, inflation, we expect the February Consumer Price Index headline to soothe your nervous Nelly sentiments on Wednesday morning. Also on Wednesday we get the Fed's Beige Book, which gathers anecdotal information on current economic conditions in each Federal Reserve Bank District through reports from Bank and Branch directors and interviews with key business contacts, economists, market experts, and other sources. While there are pocket's of economic stabilization and areas of modest improvement, the overall theme is not overly optimistic. I anticipate the market will read the Beige Book as "cautiously optimistic with many uncertainties clouding assumptions". Then on Friday we get Housing Starts and Building Permits data. At the moment I really do not feel we should be focusing on these prints as "forward looking indicators". Until we can reduce the number of existing homes on the market, it makes no sense to be building new houses....making Pending Home Sales and Existing Home Sales more "forward looking" than Permits and Starts. KNOW WHAT IM SAYING?
On the other hand, we have a relentless stock rally to contend with still. Possibly adding momentum to what feels like a rally that should be retesting its most recent gains are several manufacturing reports, the February Business Inventories release, and Consumer Sentiment on Friday. In my eyes, the growth of the labor force implies we should be anticipating an uptick in consumer attitudes. While retail investors continue to sit out what seems like a shallow stock market rally (made of glass?), professional investors are pushing equity indexes to new year over year highs. Last summer I gave up trying to pick a top in stocks, then last winter I gave in and pin-pointed 1,200 on the S&P as a 'toppy" target. The S&P is currently approaching 1195...anyone think the rally is about to reverse course???
Fundamentally, I just don't see a broad based reason to justify 10s breaking out over 4.00% yet.
Make sure you read THE WEEK AHEAD, Patrick puts a great deal of energy into making sure he hits on all the scheduled events that might move mortgage rates.
If benchmark 10s do rally, remember what we said last week about "rate sheet influential" MBS coupons and mortgage rates lagging. That will hold especially true this week because current coupon MBS valuations are just as rich as they were when the Fed was still buying mortgage-backs. READ MORE
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