The last few hours of trading finds MBS a bit lower than last post which coincided with the highs of the day. Nonetheless, nearly everything remains "green" in terms of day over day changes:
Since 5pm "Going Out" Marks....
FN30________________________________
FN 4.0 -------->>>> +0-01 to 99-31 from 99-30
FN 4.5 -------->>>> +0-02 to 101-25 from 101-23
FN 5.0 -------->>>> +0-04 to 102-23 from 102-19
FN 5.5 -------->>>> +0-04 to 103-18 from 103-14
FN 6.0 -------->>>> +0-04 to 104-25 from 104-21
GN30________________________________
GN 4.0 -------->>>> +0-02 to 100-02 from 100-00
GN 4.5 -------->>>> -0-01 to 101-29 from 101-30
GN 5.0 -------->>>> +0-03 to 103-13 from 103-10
GN 5.5 -------->>>> +0-06 to 104-01 from 103-27
GN 6.0 -------->>>> +0-02 to 104-20 from 104-18
UST10YR: 3.175%
2s/10s: 228.4 bps
DOW: +50.3 to 8469
Looking over the stack, we see a bit more price positivity in the higher coupons, aka "up in coupon." This was partially driven by the yield curve, although it remained relatively unchanged from yesterday. More importantly, this represents some continued cries of "oh! The water is still safe!" from the premium coupon swimmers who had previously vacated the pool in anticipation of faster prepayment speeds in that premium range than what was actually seen last week. Among that crowd was the best beach-body of them all: the Fed, who was in with it's normally supportive MBS buying activities today, but as opposed to their standard fare 4.0's and 4.5's, 5.0's were actually their favorite today. When Ben gets his water socks on and says "that 4% stuff is old news, I'm heading for the 5% slide today" the rest of the eager swimmers follow. Don't read too much into this however, as it is understood by all that these are temporary opportunistic forays into previously undesireable coupons that now represent a few more months of easy money.
So whereas 5.0's closed out the day an eighth higher (4 ticks), 4.0's only saw a tick. Despite the small gain, it looked a lot worse this AM when 4.0's ONCE AGAIN bounced near their long term floor range. An intraday floor at 99-25 emerged and provided solid support throughout the day. Treasuries underwent a similar turnaround with yields eventually bottoming right at the close, though things got a little leaky between then and 5pm. Chalk this up to "as expected" data, and a second consecutive day of Treasury buying by the Fed. The spread situation was quite mixed on the day with MBS the clear victor early, whereas treasuries dominated the rest of the day to leave things relatively unchanged to slightly tighter. The charts tell the story...
On the above chart, note the intraday bounces off the 99-25 range as well as the heavy resistance each time prices got over par.
Moving on to treasuries and stocks, the day of relative choppiness leaves us with mostly unchanged yields across the curve:
Of course if we're closing the day at 99-31, we're above our long term floor of concern, but how far above? Things still look good:
So where does that leave us for tomorrow? Basically, every time that we are close to that gray line on the upside, it serves as an ideal lock trigger. Defining "close" can be a bit tricker depending on the rest of the movement of the day and week, but today is not one of the tricky ones. Sure, there can always be unexpected data throwing things off wildly before lenders price in the morning, but once again, the higher probability bet is to float as long as we are above said line (this isn't the only reason mind you, but certainly the clearest visual).
Threats and opportunities tomorrow include:
- MBA Purchase applications at 7AM
- Retail Sales at 830 AM
- Import and Export Prices at830AM
- Business Inventories at 10AM
- And the relatively unimportant Oil Reserves Report at 1030AM
As far as potential headline fodder, The House Committee on Oversight and Government Reform kicks off it's AIG hearing entitled "Where is the Taxpayer's Money Going?" In addition, Class B (Fannie, Freddie, and Ginnie 15 yr loans) goes on deck for day one of it's two day settlement beginning Thursday. The Wednesday is referred to as "net out," which--although it would take a lot more time and foundational knowledge to get into--basically amounts to buyers and sellers pulling all of their socks out of the dryer (yes, we've moved into an analogy now) and figuring out which ones match up best to reduce the number of new socks that need to be purchased. The effects of net-out are usually nil, however, so this is more of an FYI.
All in all, it "feels" like markets are gearing up for their brisk trading at the end of the week while today's average volume felt light. Thursday and Friday look to be the most active days with tomorrow a potentially good lock day should we see some early (ish) gains. But that depends on your personal GUT-FLOP strategy.
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