After another "duration shedding" event yesterday the MBS stack will be looking to the yield curve (and swap spreads) for its directional guidance today...this implies we are taking supervision from the seemingly irrational activities of stock traders (the herd running back and forth from stocks to bonds).
Following a robust rally in equities yesterday we would expect to see stock investors taking some profits this morning....following the anticipated register ringing the market participants will likely take a moment to reflect upon their consolidations before deciding what direction to head next (test support or resistance?).
Going a little deeper into MBS...when spreads gapped out (and prices fell) to perceived cheap levels last week, market participants were eager to take advantage of bargain valuations...so the upside potential for a retracement recovery remains high. BUT...investors may, however, be a little less willing to take a chance on anything extension risk related....given the possibility that snowballing selling and a loss of liquidity would leave accounts of all types running for the door...begging for the street to willingly ($$$) absorb snowball selling
In terms of your rate sheets...5.00% paying par is a luxury after originators dumped near $5bn in discount MBS yesterday....unfortunately this means lenders will be cushioning their margins while the fixed income market battles equities for demand side support. The one issue we have been discussing over and over again remains..is the economy in recovery mode or did we just avoid the worst case scenario????
Anyway...the economic calendar isn't too heavy today. At 10am we get April Pending Home Sales (expecting +0.5% after +3.2 in March), later in the day domestic vehicle sales data will be released. Who knows what headline news event will be moving money today...maybe it will be GM's bankruptcy...remember that happened yesterday???? Actually....Pending Home Sales data will be the market's main focus...but be ready for anything...the stock market is starting to wonder whether or not they are getting ahead of themselves.
So far this session "rate sheet influential" coupons are indeed pacing the price behavior of comparable benchmark TSYs. The 10 yr note is +16/32 yielding 3.61%. In terms of relative value...the FN 4.5 has shown signs that +90/10yr TSY is the market's median "NEUTRAL ZONE" ...which happens to be right where spreads are at the moment.
So we are getting small recovery rally ahead of what is setting up to be a 10AM "headline news" money moving event....
2s/10s: 270.17bps
6/1 EFFECTIVE FED FUNDS: +0.02 to 0.21 from 0.19
LIBOR FIXINGS
O/N LIBOR: -0.0012 to 0.2612 from 0.2625
1 MONTH: +0.0000 to 0.3200 from 0.3200
3 MONTH: -0.0037 to 0.6463 from 0.6500
6 MONTH: -0.0000 to 1.2337 from 1.2337
1 YEAR: +0.0137 to 1.6075 from 1.5938
PS Yesterday, Federal Regulators released details of Loan Originator Registration Requirements...READ MORE
MBS Market Alerts
