After reaching an intraday high of 3.88% , the 10 yr TSY note yield dropped 10bps in two hours...all the way back to yesterday's 3.78% profit taking point. This yield resistance range (some say support, we say resistance because we want yields lower) held strong as intraday gains were consolidated and new positions were set. Immediately following the consolidation, traders began testing our previously pointed out 3.82% support level...a test we have passed three times so far.
That said...
If we can hold below 3.82% for the rest of the day...it means nothing. I really hate to use the term "neutral bias"...but I am not really sure how else to describe the current outlook of yield curve traders. Technical indicators are mixed and fundamentals are varied. Going into next week, range trading will continue to moderate as market participants weigh FOMC expectations against the seemingly never ending supply TSY debt.
As far as MBS go...as we said might occur this AM, once TSYs started rallying the Fed (and others? not sure yet) stepped in to stabilize the considerable amount of morning weakness exhibited by "rate sheet influential" MBS coupons. A rally ensued in prices and yield spreads TIGHTENED. Since 10AM, the FN 5.0 has rallied 14 ticks and several lenders have repriced for the better...pushing mortgage rates a few bps lower.
Although a modest recovery has been made for mortgages, I cannot stress enough that trading flows are light and liquidity is likely to continue to progressively "dry up" as the day progresses (and traders spend more time checking the leaderboard at Bethpage). This means that REPRICES FOR WORSE are a lingering concern...remember what happened in after hours trading yesterday?
2s vs. 10s: 255bps
Who you got at US OPEN?
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