Good Afternoon vacationers....I mean readers.
Although there have been moments of anxious anticipation when it appeared that technical support just might be broken....you didnt panic and markets eventually made their way back to status quo levels. YAY for not panicking. Now, as the week draws closer to a close, markets are quiet...happily resting in recent ranges.
The week ahead is a supportive time for the mortgage market as month end index extensions (big time), a general focus on settlement, and lower implied volatility (NFP) often assist in MBS outperforming TSYs (spread tightening). Unfortunately if benchmark TSYs are selling off, the "outperformance" wont be noticeable to the mortgage originating community as "rate sheet influential" MBS prices would be plummeting, regardless of supportive events...this would regrettably be reflected in your rate sheets.
Something Vic always discusses on the Mortgage Rate Watch blog is the notion that mortgage rates always rise faster than they fall. The same is true for MBS yields ..they rise faster than they fall (Prices fall faster than they rise). The reason I bring this up is the growing concern of a great inflection point in the marketplace.
The bond market performed quite well this week..all while ignoring "record supply" headlines and economic "better than expecteds", both usually net negatives for fixed income and mortgage rates. However, the market maintained a ho-hum apathetic attitude about it all. Yes, we had to deal with several knee jerk reactions followed by choppy price patterns, but when the smoke settled, status quo had essentially been restored....the range had moderated.
Range trading reflects a feeling of indecision. This unsure attitude was obvious this week as many logical reactions were overlooked by market participants. Even though this was vacation week on Wall Street, we are not willing to overlook the storm that may be brewing in the rates market.
The 10 yr note has been bouncing back and forth between 3.45 and 3.75 all summer. Recently we've spent a good deal of time hovering near this all important resistance level.
Although we would love nothing more than to tell you that the market will happily continue to trade in this narrow region...given the current "BETTER THAN EXPECTED", cost cutting, 3Q/4Q GDP growth tone of the marketplace...what's to say the RECOVERY trade doesnt carry on in stock markets? Nothing. Up until now fundamentals have been useless. What's to say this trend doesnt continue? If the short term optimistic outlook remains the driving force behind flows....it will not bode well for the fixed income sector.
So, with summer coming to an end and the market (and money) preparing for a return to work (after Labor Day?) we must remind: FLOATING REMAINS SUPER RISKY. Manage risks appropriately.
I am done for the week. I leave you the same way I greeted you on Monday...WITH THIS HALARIOUS VIDEO
Enjoy your weekend!
MBS Market Alerts
