Recap of Yesterday

  • Obama proposed small business tax cuts and energy efficiency rebates -- a so-called cash-for-caulkers program -- to boost jobs, but gave no details on the cost of the measures. He also called for an extension of unemployment and health insurance benefits for the more than 15 million out-of-work Americans, and stressed that reducing the jobless rate was the best way to tackle the country's record deficit. READ MORE
  • Treasury moves to improve the loan modification process. READ MORE
  • NFIB Small Business Optimism Index  falls to 88.3 in November vs. prior 89.1. Lowest read since July 2009. Plans to hire -3%. READ MORE
  • The dollar appreciated against a basket of currencies after Fitch cut Greece's credit rating and Moody's downgraded  Dubai's government related debt rating.
  • Oil and Gold prices plunged as a result of dollar strength and a downward revision to global oil demand forecasts.
  • The S&P was down 1.03% to 1,091.89, the Dow fell 1.01% to 10,825.66, the NASDAQ dipped 0.76% to 2,172.
  • Treasury auctioned $40 billion 3 yr notes at high yield of 1.22%. It was an average auction overall. Directs take 2.9%, Indirects awarded 60.9%, Dealer get 36.2%
  • The yield curve flattened 1bp... 2s/10s went out at 266bps. Volume was concentrated in the short end of the curve thanks to a modest flight to safety bid. After touching 3.35% in the overnight session and hitting 3.41% mid-day,  10s meandered back to the 3.38% pivot heading into the close.

Mortgages opened the session in FACEMELTING status yesterday....every offer was lifted as buyers once again greatly outnumbered sellers. However, the tide turned and improvements fizzled out heading into the 3 yr note auction at 1pm.  Lenders repriced for the worse as a result and mortgage rates ticked higher. The FN 4.0 ended the session +0-04 at 99-09 yielding 4.099%. The FN 4.5 went out the door +0-07 at 102-01 yielding 4.252%. The secondary market current coupon closed at 4.145%, 4bps lower than Monday's close, but well off the intraday low yield of 4.064%. In terms of relative value, the current coupon started the day much tighter vs. benchmarks, but lost all improvements as the day progressed. The CC went out at 75bps over the 10yr note yield and 62 basis points over the 10yr swap rate.

So Far Today

  • SHANGHAI -1.73%, HANG SENG -1.44%, TOPIX -1.31%, NIKKEI -1.34%, CAC -0.14%, DAX -0.15%, FTSE +0.03%
  • Japanese Q3 GDP revised for the worse, from initial read of +1.2%  to +0.3%. READ MORE
  • Democrats reach a deal on health care bill. READ MORE
  • Baby boomer population's preparation for retirement  raises a skeptical eyebrow. READ MORE
  • Fed Governor Duke speaks on successful neighborhood stabilization. Doesn't comment directly on the outlook for rates or economy. Does say the foreclosure crisis is stressing communities.  READ MORE

After a robust rally over the past two sessions, the dollar is giving back a portion of gains. The dollar index is -0.45 at 75.969. Oil and Gold are both trading higher, albeit off intraday high prints. S&P futures have chopped around between 1,091 and 1097 so far today. Currently at 1,091...

Not much progress was made in the rates market overnight. 10s moved sideways around 3.40%. This reflects a focus on today's $21 billion reopening at 1pm. Given the relatively empty economic calendar, there really isnt much else to focus on besides year end/seasonal support and this week's auction cycle. That said, the notion of "play the range until the range plays you" continues to dominate strategy. This implies we will lean on the "buy on the dips, sell on the rips" bias. Again, in the absence of market moving data, our range fences have tightened up. 3.37/38% has proven firm resistance while 3.42% has brought out real money "window dressing" buying.

The 10yr is currently +0-01 at 99-29 yielding 3.386%...

"Rate sheet influential" MBS prices are flat to start the session, but the market is trading weaker vs. benchmarks.  The FN 4.0 is +0-00 at 99-09 yielding 4.099% and the FN 4.5 is +0-00 at 102-00 yielding 4.256%. The secondary market current coupon is 4.146%. Yield spreads are however wider this morning. The CC yield is 77 basis points over the 10yr TSY yield and 64 basis points over the 10yr swap rate.

101-30 provided support yesterday, something we expect to continue unless the 10yr trades above 3.42%...or.....if the lack of MBS liquidity that set in yesterday carries over into today's session, which appears to be the case. This implies MBS prices may fall further than usual if TSY yields back up. Today's auction may provide more directional guidance, but as 2009 comes to an end, we have to pay extra close attention to slowing trade flows and a general lack of liquidity as vacation time is used and "out of office "replies become more prevalent.

Rate sheets should be mostly unchanged....