So much for those signs of stability we were seeing....
Early in the session, following better than expected housing starts data, the 10 yr TSY note yield rose sharply from 3.56 to 3.63. This occurred right around 845...at that time the 10 yr was testing 3.57, once those support level probes failed, we witnessed a spike in trading volume in 10 yr futures contracts and yields instantly rose 7 basis points.
Here is the uptick in 10yr yields and the S&P so far this morning. Notice as stocks began to tick higher, TSY yields moved up. TSY traders skittish about sentiment in stocks. Darn traders keep defying technical logic! (We already know fundamental logic is non existent....what is governing markets at this point? TRADING PROFITS)
Although FN 4.5 prices were able to hold steady for a moment following TSY selling, the extent to which the market shifted its sentiment (volume spike) eventually forced traders to adjust hedge ratios to account for a steeper yield curve and higher interest rate volatility, which resulted in lower "rate sheet influential" MBS prices. This was bad timing for loan officers and floating borrowers as lenders took a moment to reconsider their rate sheet strategies. That said, the handful of rate sheets we have seen this morning are noticeably worse...except one, which is barely changed from yesterday (pricing was weak already though).
In regards to specific MBS trading flows.... Asia has been a buyer this morning. Asian accounts are generally GNMA coupon buyers. Other than that we've seen just under $1 billion in supply on bid lists so far...this is relatively decent volume for a summer Friday, but still nothing to write home about...
The below chart illustrates the weakness in "rate sheet influential" MBS coupons...although dollar prices are lower, yield spreads are slightly tighter as accounts appear to be doing some bargain buying. Remember tighter yield spreads means MBS are outperforming benchmarks...which implies there is demand side support...FROM THE FEDERAL RESERVE.
Interest rate option volatility is higher again.
2s vs. 5s: 151bps
2s vs. 10s: 263bps
5s vs. 10s: 113bps
The S&P is down 1.92 to 938. The Dow and the NASDAQ are both barely higher. Today is option expiration day in equities...this may lead to increased volatility in stock markets later today. In regards to the specific resistance levels on the S&P...950 is a MAJOR resistance price point. That said we must watch volume in order for any "confirmations" to be made...low volume implies no strength in a rally. Volume is light so far this morning
MBS Market Alerts
