TOMORROW! With today's lack of data and ultimately, movement, tomorrow's impending events trump today's actual events (or lack thereof...).
Ok, I apologize for the narrative hook there, but it actually is the case, despite the packaging. With ISM non-mfg as the only report of the day, an 8 tick trading range, and a 1 tick movement on the day (zero in tsy's), there wasn't much of a point to today... Take a look at today's volume compared to the previous session. Feel free to take note and draw any conclusions you want about Friday's losses halting at 119-06 in high volume followed by a moderate uptick in volume this afternoon supporting the same floor. Oh, those are futures by the way... MBS are not actually at 119-07... Cue twilight zone theme if they were...
One benefit of the slow market was that it allowed lenders another opportunity to hold current MBS prices up to the light, verifying authenticity and reluctantly add the gains into rate sheets. Great rates were the talk of the town today as we got a small but nominal decrease in some of the uncertainty premium commanded by the weekend as well as the "this is all so new!" premium commanded by the rapid movements at the end of last week. Don't be surprised to see these sorts of rates (4.5 with rebate, etc...) make their way back into the market more quickly than they did when MBS initially spiked this high at the beginning of the year. A lot of unknowns have been cleared up since then that kept primary/secondary spreads artificially high. Additionally, lenders have the benefit of past experience to inform such price levels whereas they did not "back then." In fact, the last time prices were over 101, just on the other side of the recently weathered summer storm, was the first time in history that 4.5's held above 101 with any semblance of stability.
But as alluded to previously, tomorrow holds the more important set of events and price movements tomorrow. And don't forget that sideways movements are just as significant as directional movements when we're trading near all time highs with reasonably inflated primary/secondary spread. Those events? Sadly, they are neither numerous or exceedingly epic, but they're important if we hope to guage the liklihood of continuing to operate in the golden range.
Actually occurring during business tomorrow will be the familiar 1pm data of recent memory, treasury auction results. This time, it's 3yr notes, admittedly not as meaningful as some other varieties, but considering recent departures from familiar ground, the market will take anything it can get by way of suggestion, and so will we. So the gameplan is much as it has been: no morning data softens some of the more extreme risks that can be associated with overnight floating. It's TOMORROW where overnight floating will be a much tougher call.
Not on most economic calendars, yet vitally important to the MBS market, is tomorrow afternoon/evening's prepay report. This will give us an idea of the speed at which MBS were paid off in the month of September. Analysts are expecting speeds to increase in 5's and 5.5's due to refinance activity. Depending on that speed, those coupons might look like a good deal from a relative value perspective, and incite a modicum of UIC bid regardless of the yield curve. More important will be the performance along the production end of the stack. If 4.0's are "slow enough" that will help the bid maintain support assuming the yield curve allows. The unlikely and unfavorable occurrence would be FASTER than expected 4.0's, which would also shift the focus UIC ("up in coupon").
As we said though, this data doesn't hit until late afternoon. And most of the time, it's close enough to expectations that it's not much of a market mover. But on the occasions it does motivate rate changes, it seems to come out of left field because of it's potential disconnection with the broader market. Also, any time we're operating in the "brave new world" price levels (both a new world from summer lows and the longer term new world that defines 2009), prepayment speeds take on some extra importance.
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