"MBS RANGE TRADING WILL BE AT THE MERCY OF THE YIELD CURVE"
...this assumption is still in play.
So far this morning the 10 yr TSY note yield has gyrated around a range between 3.55% and 3.59%. The price range moderating "rate sheet influential" prices has indeed been influenced by the perception of MBS relative "richness" or "cheapness" compared to the behavior of the UST10YR.
As the yield spread between the FN 4.5 and UST10YR note widens into the mid-90 range (difference between yield of FN 4.5 and yield of 10 yr TSY note) the market begins to view "rate sheet influential" coupons as relatively cheap...and buying picks up. As the yield spread tightens closer to +90/10yr..the market sees this as relatively rich...and selling ensues...
The fundamentals driving the price behavior of TSYs could be described as a "wait and see" sentiment. Short term range trading is restraining the extent to which TSYs improve/deteriorate as the entire marketplace is setting up for the release of the big kahuna of economic data reports on Friday...Non-Farm Payrolls: The Employment Situation Report. This implies volatility should diminish (Implied Volatility) as the market awaits new direction...which will be beneficial for the stability of "rate sheet influential" MBS coupons. Adding to the theory that volatility will calm is the fact that the same sideways bias has set in over the stock market.
In terms of rate sheets...this "wait and see" sideways mentality should allow lenders to keep mortgage rates stable near 5.00% (for most qualified). Some lenders will be looking to do some last minute "bucket filling" to ensure they meet all of their commitments...they will offer more aggressive than usual pricing. Other lenders will happily go into a holding pattern ahead of what is expected to a sentiment shifting event on Friday. If you are floating a purchase and need some advice..the 10 yr TSY runs into resistance as it nears 3.50% and the FN 4.5 will likely not venture too far into par territory as lenders and servicers have become net sellers at this price point. Unfortunately if you are looking to pick up YSP, barring any tapebombs, rate sheets will likely stay range bound over the next 48 hours...
Looking for New Direction...
Following a four day stock market rally, the question we have been asking over and over again...IS THE ECONOMY STABILIZED OR IN RECOVERY MODE?...is finally on the mind of the entire market. The market is looking for new direction....Friday Friday Friday (maybe some activity after jobless claims tomorrow) is in focus!
This morning Ben Bernanke shed some light on what he thinks about the trillion dollar question. Speaking in front of the House Budget Committee, Bernanke's tone is once again....MIXED. He is cautiously optimismic while warning all not to get overly excited as the economy is still quite fragile....here are some excerpts from his testimony...
The most recent information on the labor market--the number of new and continuing claims for unemployment insurance through late May--suggests that sizable job losses and further increases in unemployment are likely over the next few months.
However, the recent data also suggest that the pace of economic contraction may be slowing. Notably, consumer spending, which dropped sharply in the second half of last year, has been roughly flat since the turn of the year, and consumer sentiment has improved.
In coming months, households' spending power will be boosted by the fiscal stimulus program. Nonetheless, a number of factors are likely to continue to weigh on consumer spending, among them the weak labor market, the declines in equity and housing wealth that households have experienced over the past two years, and still-tight credit conditions.
We continue to expect overall economic activity to bottom out, and then to turn up later this year. Our assessments that consumer spending and housing demand will stabilize and that the pace of inventory liquidation will slow are key building blocks of that forecast.
(MND NOTE: The foreclosure moratorium is over...this will weigh on the housing recover)
An important caveat is that our forecast also assumes continuing gradual repair of the financial system and an associated improvement in credit conditions; a relapse in the financial sector would be a significant drag on economic activity and could cause the incipient recovery to stall.
Even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilization will increase further. We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly. In particular, businesses are likely to be cautious about hiring, and the unemployment rate is likely to rise for a time, even after economic growth resumes.
In this environment, we anticipate that inflation will remain low. The slack in resource utilization remains sizable, and, notwithstanding recent increases in the prices of oil and other commodities, cost pressures generally remain subdued. As a consequence, inflation is likely to move down some over the next year relative to its pace in 2008. That said, improving economic conditions and stable inflation expectations should limit further declines in inflation
Clearly, the Congress and the Administration face formidable near-term challenges that must be addressed. But those near-term challenges must not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances. Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.
See what I mean by "mixed"?
In other news...
The Fed was participating in the fixed income market too this AM....purchasing $7.5bn TSY coupons maturing between 2016 and 2019. This coupon pass was a positive event for TSYs and MBS...
ISM Non-Manufacturing Index Suggests Struggle for Recovery Continues
At the moment stocks are sideways and the yield curve is holding steady...
2s vs. 10s: 265bps
Dow: -93 to 8647
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