The expensive stack is getting in our way!!! Remember when prices of MBS coupons skyrocket like they did last week the market will look to allow bids to cheapen up (and let MBS/TSY spreads widen). Take a fundamental supply/demand approach when trying to make sense of this....
Strong demand pushes up prices quick because everyone wants to get their hands on MBS while its relatively cheap and "in style". Once the prices get too expensive, if buyers aren't in need of that MBS right now, they will say ok this is too expensive, I dont need MBS that much....I will wait for prices to get cheaper.
When new supply of loans hits the MBS market when prices are relatively expensive, it will not be met with fierce demand. Instead market participants will gladly take the opportunity to allow prices to cheapen up, let spreads get wider, and then return to the market as a buyer. That is what happened after lunch...MORE MORTGAGE BANKER OFFERINGS OF NEW LOANS were not met with big demand. Remember when we say MBS is expensive the market will generally turn their nose up at new supply.We do not expect this sell off to last long though...once prices cheapen up a few ticks and spreads widen...buyers will return to take advantage of lower prices. We'll see how quickly that happens today...hasnt taken long over the past month for this "re-up" to occur....
APRIL FN30_____________________________
FN 4.0 -------->>>> -0-08 to 100-00 from 100-08
FN 4.5 -------->>>> -0-09 to 101-20 from 101-29
FN 5.0 -------->>>> -0-04 to 102-25 from 102-29
FN 5.5 -------->>>> -0-04 to 103-13 from 103-17
FN 6.0 -------->>>> -0-01 to 104-03 from 104-04
APRIL GN30_____________________________
GN 4.0 -------->>>> -0-06 to 100-06 from 100-12
GN 4.5 -------->>>> -0-09 to 101-25 from 102-02
GN 5.0 -------->>>> -0-05 to 103-08 from 103-13
GN 5.5 -------->>>> -0-01 to 103-28 from 103-29
GN 6.0 -------->>>> -0-02 to 104-10 from 104-10
I suppose the continued onslaught of TSY supply "yet to come" is not a concern of some fixed income buyers...especially foreign ones!
The 2 year Treasury note auction is done. It got GREAT DEMAND. The bid-to-cover ratio in the auction (measures demand) was 2.71. PERSPECTIVE: the average bid-to-cover ratio of the last 12 UST2YR auctions is 2.37
Indirect bidders (foreign central banks) took home a big chunk.....53% of the auction. PERSPECTIVE: the average indirect bid accounted for an average of 31 percent in the last 12 UST2YR auctions. That is the largest indirect participation since November 2006.
HIGH YIELD: 0.95...lower than it was trading before the auction. This means buyers were enthusiastically eating up whatever they could get!
I know many are wondering about China's participation...here is a statement recently made by Hu Xiaolian,Deputy Governor of the People's Bank of China (PBC) and Administrator of State Administration of Foreign Exchange (SAFE)....
"Investing in American Treasuries, as an important part of our foreign exchange reserve management, will continue"
PLAIN AND SIMPLE: Investing in American Treasuries, as an important part of their foreign exchange reserve management, will continue from China. :-D