Good Morning Happy Friday.
While stocks have moved aimlessly higher and lower today, the bond market has continued to chop around its recent range, failing to make any forward looking progress. The 10 yr note hit 3.37% overnight before trading higher in the mid-7AM hour. Around 10AM the UST10YR hit the all important 3.45% pivot point and reversed course (served as floor yesterday morning, ceiling yesterday afternoon). Although price action has been whippy...the range is keeping highs and lows in check as market participants remain weary of too much strength and mindful of relative cheapness. This is all occurring in light volume.
We have been positioning within the range that has developed off the Sept 9 high....with a watchful eye on retracements of August yield highs, high volume marks, and moving averages. As you can see below, 117-18 is the 50% retracement of Sept.9 10yr contract price highs. The 10yr tested that level overnight but failed...which has been a reoccurring event this week (with one exception)....
In the cash market, that price corresponds to a yield of 3.38....which we havent broken all week (one exception last night)...
The underlying theme thus far has been an unwinding of bull flattener positions.
Bull flattening is when long term rates are falling faster than short term rates, which tightens the yield spread between long term rates and short term rates and flattens the yield curve. Remember we have been talking about a flatter yield curve? Tighter 2s/10s spreads? Selling 2s and buying 10s?
This morning around 730AM, the 2s/10s sector of the yield curve started steepening as trader's sold 10s (2s outperformed 10s in yield). As you can see the 2s/10s curve ran into support at 247bps (or resistance depending on your perspective..support for mortgage rate watchers).
Plain and Simple: A variety of technical outlooks and trading strategies are affecting price action. The result: RANGE TRADE!!!
In the secondary mortgage market it has been more of the same ol same ol. Rate sheet influential yield spreads are tighter as the Federal Reserve continues to provide 2x liquidity to mortgage bankers looking to hedge pipelines. Bankers and other real money accounts are selling 5.0s and 5.5s as the yield curve steepens. Hedge funds and other fast money types are trading up in coupon. In government space, GNMA traders are to recouping after an exhausting roll day yesterday. (Class C notification day yesterday)....6.0s got punished.
Looking at price action, the FN 4.5 is -0-07 at 100-23. If the RED makes you sad, here is week over week chart. Not a bad week for "rate sheet influential" MBS coupons, not bad at all (higher and tighter!)...we are back to last Friday's pre-lunch price levels.
Rate sheets are worse than yesterday afternoon but unchanged from yesterday morning.
RE: Quadruple Witching Day
Dont think we see any crazy action this afternoon, most positions appear to have been rolled already. PLUS the Rosh Hashanah holiday begins tonight at sunset, so expect to see a few more "OUT OF OFFICE" replies than normal.
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