Well Well Well...a little better than expected economic data (not really though), some stronger than anticipated earnings, a little volume in stocks....AND ALL OF SUDDEN OUR ECONOMIC ANXIETIES ARE ALLEVIATED!!!!
The S&P is over 905. Its over 912. Its over 918.....and now looking to test 927.
Hallelujah! THE RECESSION IS OVER!!!! JOBS FOR EVERYONE!!! NEW HOMES FOR ALL!!! SPEND SPEND SPEND!!!!!
PLEASE NOTE SARCASM....lets come back to reality.
How did Goldman make $10.78bn of their $13.76bn net revenues?
TOTAL TRADING AND PRINCIPAL INVESTMENTS.....$6.795bn in Fixed Income, Currency, and Commodity Trading and $2.157bn in Equity Trading ($3.178 after commissions). $8.952bn generated just from FICC and Equities trading. That's 65% of net revenues.
Why do I bring this up?
...because this is a trader's market. In a trader's market....traders TRADE! Today there is reason to move prices higher...see reasons above.
Notice how much time I have been spending discussing technical trading strategies lately? Not so much on the fundamentals right? That is because fundamentals aren't offering up much guidance on the present value of future cash flows...BECAUSE NO ONE KNOWS HOW FUTURE CASH FLOWS WILL BE GENERATED. So how can we make any economic assumptions based on what the stock market is telling us?
We cant! Dont make any economic assumptions based on the gyrations of the stock market. There has been no shift in the long term outlook here. Better than expected earnings reflect cost cutting and inventory liquidations, the big bankers are on government subsidy life support (mortgages...huge spread relative to cost to borrow? arbitrage? mark to market????). This reflects a stabilization (2nd derivative), not a recovery.
That said here is quick reality reminder: the labor market is not in "recovery mode" in any way shape or form. Housing supply remains over 10 months while consumer credit is tight. Whats the biggest asset on consumer balance sheets? THEIR DEPRECIATING HOUSE! That said one wouldnt expect consumption/spending to pick up because consumers will look to save save save in an effort to rebuild lost wealth. Less spending is not positive omen for struggling retailers...which leads me to an announcement that was released yesterday...S&P downgraded 19 classes of once AAA rated commercial real estate yesterday (super senior A-1 A-4 from AAA to BBB-). Point taken?
This is a trader's market people...technical trading strategies lead the way. The big picture is still hazy, there is still a massive amount of economic uncertainty....and much weakness in several fundamental sectors.READ OUTLOOK.
Anyway...this short term, earnings week optimism is having negative affects on TSY and mortgage rates...
The 5 yr TSY note is currently 9/32 lower in price yielding 2.42%, while the 10 yr TSY note is -18/32 lower in price yielding 3.54%. In the past two sessions the yield curve is 15bps steeper.
The bond market is definitely in defensive mode as equities blasted through several technical resistance levels this morning. Consequently there has been strong selling of benchmark TSY notes, so far 520K contracts have bee traded already...that is healthy volume. However with econ data mostly behind us (waiting on FOMC minutes at 2pm), selling has somewhat subdued for now and the 10 yr has found a range near 3.55%...
Unfortunately until stocks show some sign of returning to reality (sorry for the bias in that statement), bond traders are likely to "sell into strength" and continue to protect their positions with the purchase of options contracts. Hmmm look at that....interest rate option volatility has ticked up again today...(3m/10yr proxy now at 186)...that means it cost more to buy an option, making it more expensive for traders to hedge their positions. (call and put options more expensive because higher volatility increases possible upside returns of the option. Remember higher volatility = wider range of expectations for future interest rates). Swap rates also getting higher...making it MORE EXPENSIVE to hedge positions!!! Darn it...is there a snowball forming here?
The noticeable weakness in the fixed income market is leading MBS prices lower...
Consequently...MORTGAGE RATES ARE HIGHER TODAY.
There are, however, positive forward looking implications for MBS in regards to higher interest rate volatility...first this general fixed income weakness is making MBS dollar prices cheaper!!! MBS loves a sell off right now. Next..this is super complicated and I dont want to get too far into right now but...OPTION ADJUSTED SPREAD LEVELS are getting wider...this means MBS are getting cheaper in two ways...on an absolute (dollar price) and relative (yield spreads) basis. That is good for a recovery rally...and if your big picture bias is for economic stagnation(like mine)...a recovery rally is enevitable in MBS land. For timing of such a recovery...see stock markets.
PS I know this post is very technical which may require you to read it more than once to understand the WHYs of why mortgage rates are higher today...if you dont understand something...ASK A QUESTION!
2s vs. 5s: 144bps
2s vs. 10s: 256bps
5s vs. 10s: 112bps
NYMEX Crude is trading over $60 at $60.93
USD/JPY: 94.05
EUR/USD: 1.4115
S&P: 925.28
MBS Market Alerts
