Recap of Yesterday

  • Number of workers filing new claims for jobless benefits fell to nine month low
  • Consumer prices rise...trend still benign
  • Manufacturing soars in NY, tumbles in Philly
  • Fed reported $16.1bn in weekly MBS purchases. Extending the trend of decreasing net weekly purchases
  • Goldman Sachs reported earnings per share of $5.25 in Q3, beating expectations for $4.25
  • Stocks trade flat all morning after earnings, then move higher into afternoon. S&P ends day +4.54 (0.42%) at 1,096. Dow +.47% at 10,062. NASDAQ +0.05% at 2,173
  • TSY yields move higher as traders prepare for Bank of America, Google, GE earnings,  Consumer Sentiment, TIC, Industrial Production and Capacity Utilization data.
  • 2yr yield reaches 0.959%. 10yr Treasury touches 3.48%. 
  • The Yield Curve is super steep. 2s/10s hits 252bps (the long end is cheap, borrow short/lend long is very profitable)
  • Mortgage rates tick higher as benchmark  yields rise and MBS prices fall
  • Rate sheet influential MBS prices fall. FN 4.5 opens at 100-27+, closes at 100-15. 
  • It was busy busy day in terms of MBS trading flows. Almost $2.5 in GN paper hit bid lists.Servicers sold 4.0s and 4.5s as yields rose.
  • When yields bounced lower the Fed, hedge funds, money managers, and pension funds starting buying. 
  • "Up in coupon" profit taking noted
  • Rate sheet influential MBS coupons, the FN 4.0 and FN 4.5,  continue to be outperformed by 5.0s, 5.5s, and 6.0s. 

So far this AM

  • SHANGHAI -0.11%, HANG SENG -0.31%, TOPIX -0.35%, NIKKEI +0.18%, CAC -1.00%, DAX -0.87%, FTSE -0.47%
  • Bank of America reports Q3 $1bn loss or $0.26 per share. Analysts were expecting $0.03 loss  per share.
  • GE reports Q3 earnings per share of $0.22 versus analyst survey estimate of $0.20. 
  • Stock futures trade lower. 10 yr futures trade higher. 10yr futures pivot point at 117-26 or 3.46% level in cash market

Here is the 10yr TSY in yield...


The FN 4.0 is +0-00 at 97-24 yielding 4.231%.  The FN 4.5 is current trading +0-00 at 100-15 yielding 4.445%. The secondary market current coupon 4.392%.

Here is a chart of the FN 4.5. Prices are off their AM highs....

For more on what is moving money in the bond market READ YESTERDAYs CLOSE

The yield curve is flattening. The long end of the yield curve is CHEAP. Borrow short lend long...

There is no reason to believe the Fed will raise rates anytime soon, thus yields in the short end of the curve will remain in record low territory...thus yields in the long end of the curve will only go so high before buyers start taking advantage of the spread between yields in the short end of the curve and yields in the long end of the curve. When the yield curve is steep it is VERY PROFITABLE to borrow short term funds and lend them out...just make sure you lend the money to someone who will pay you back...like the US Government.

The above discussion on the cheapness of the long end of the yield curve combined with bond friendly econ data and earnings is helping us avoid a test of 3.50% and lower MBS prices.

The range is still moderating markets.

MBS, TSY, LIBOR QUOTES