The 10 yr TSY note is aggressively testing the inertia of yesterday's low yield of 3.71% . Currently the 10 yr is +8/32 yielding 3.68%. If this yield level holds and 3.71% becomes a strong support level...our intermediate term bullish bias will be confirmed. Selling into strength remains a worry as volume is light in 10s and traders will not be quick to forget the looming supply of auctions to come (expecting $101bn 2s/5s/7s next week).
The current coupon FN 5.0 MBS has indeed stabilized and found a range. Since rate sheets havent seen noticeable gains today (after a rally yesterday), many originators are expecting to see YSP improvements. Well, unfortunately most lenders will be hesitant to pass along these intraday gains as volume is low in the secondary market and profit taking remains an issue.
There is a bright side though. The FN 5.0 is being outperformed by its benchmark big brother UST5YR....meaning yield spreads are wider and the FN 5.0 is looking cheaper compared to its benchmark. This is a positive!!! Why? If there is selling in TSYs and benchmark yields move higher...there will be a cushion for the FN 5.0 to remain stable (reprice-wise). See chart below for relative "cheapness"....
Its pretty quiet in MBS world at the moment....
Interpolated MBS "current coupon" is 4.75%....we are tempted to switch back over to the FN 4.5 but have decided to stick with the FN 5.0 for now....
2s vs. 10s : 248.03
S&P: -8.74 at 914.98
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