Markets are in waiting mode again. Searching for confirmation.
Selling in the S&P has stalled at a KEY SUPPORT level as market participants are awaiting confirmation that there is indeed reason to continue the recent bearish trend in stock markets. That confirmation will likely come as 2Q earnings season begins as traders start to get a better idea of how firms plan to make money in the future.
This is illustrated by the tight range currently moderating equity trading. The S&P has failed to firmly break 882 support, but has also failed to break 888 resistance. If the market was truly bearish about the perception of the economic recovery, the S&P would be trading closer to 870. The hesitation implies that the marketplace needs more confirmation of a slow stagnate recovery process....dont discount the fact that this test of 870 could come by the end of the day.
This sentiment is also obvious when looking at a chart of the 10 yr TSY yield. Notice, just as the S&P is range bound, seemingly stuck in a "waiting and see" mode, so is the benchmark 10 yr TSY. Except the 10 yr note is testing resistance levels, whereas the S&P is looking for confirmation that stocks need to further discount the future earnings of domestic companies.
There are traders attempting to set up for the 1pm auction, fortunately for us those efforts are being overshadowed by weakness in stocks (and perhaps short covering, not sure yet). That bullish feeling in fixed income implies demand for the 10 yr note should be healthy. Although I will add that dealers are likely to demand a yield that is higher than current market....remember: last auction high yield was 3.99...current market is 59bps less! Might be an issue, but weakness in stocks helps demand nonetheless. I am saying that the stock lever has the potential to override any percieved auction weakness.
Here is a look at the recent auction history:
Now for MBS...
Remember the talk we had yesterday about convexity buyers? READ THIS POST FOR REFRESHER
Well...as the yield curve continues to flatten, "rate sheet influential" MBS prices are creeping higher and higher...but not at the same pace as TSYs. Yield spreads are getting wider this morning, TSYs are outperforming MBS. Check out this chart of the FN 5.0 yield vs. the UST5YR yield (advanced readers I have 5.0 yielding 4.56% at 10 CPR, 4.33% at 18CPR, and 4.07% at 26 CPR,which is what eMBS printed last night...I will stick with 18)
This reflects the MBS market's hesitation to "make a move" into current coupon MBS before stock and TSY rallies are confirmed. Yes...MBS prices are improving, but yield spreads are wider. MBS NEEDS CONFIRMATION before accounts add duration/move"down in coupon" and "rate sheet influential" MBS rally. But once that CONFIRMATION occurs...the rally could be a FACEMELTER....but it will take the stars aligning.
The stars aligning: stocks confirming bearish bias + bonds confirming bullish bias + lower interest rate volatility = less MBS convexity anxiety = BETTER MORTGAGE RATES
Until then prices of "rate sheet influential" MBS coupons will be skittish of any benchmark sell offs, nervous about letting profits sit too long (yes profit taking is occurring in MBS), and hesitant to let prices move higher. You know what that means for lenders right? They too will be skittish, nervous, and hesitant with rate sheets. Waiting for confirmation, waiting for the stars to align....
2s vs. 10s: 246bps
MBS Market Alerts
