Rate sheets are out. I still see 4.875 paying on raw rate sheets (not talking about mandatory one-off's). 15 year conventional pricing is pretty aggressive by the way, that is in-line with rising demand for "shorter duration" MBS cash flows in the secondary mortgage market.
This morning started with a progressive poking and prodding at resistance levels, however as expected the market's un-willingness to push prices passed pivot points was made obvious as both 10yr TSY yields and "rate sheet influential" MBS prices failed tests to breakout of the confines of the recent range. Before I start making any speculative assumptions about the lack of progressive momentum in the marketplace, let me share with you that trading volume is well below average today.
In 10s, the first step in the right direction is moving through 3.80 resistance, then a break through 3.78% which was followed by a test of 3.75%. As shared in the OPEN, we find it unlikely (barring a tapebomb) that rates give back much of the supply concession that has been priced into fixed income instruments...at least before the auction process is completed. Afterwards the market will have the opportunity to re-align positions and re-allocate funds, which does provide some hope in the short run for a corrective rally.
Plain and Simple: we see the potential for a recovery after all $84 billion in TSY debt is underwritten by the marketplace (last auction is on Thursday)
3.75% is the price target. If that pivot is approached one of two things will occur...profit taking will slow momentum and short positions will lead rates higher OR profit taking will not be enough to slow sidelined money from pushing rates lower which would lead to forced buying from the convexity crowd (servicers). Once servicers start buying "rate sheet influential" cash flows...we will be more confident about a rates recovery rally.
In the mortgage market, both trading flows and MBS loan supply have been lackluster today, with most price directionality being a function of the range's upper and lower limits. Just as progress in benchmark yields has been contained by the recent range...so to have MBS prices. The FN 4.5 is currently +0-07 at 100-10 yielding 4.476. The secondary market current coupon is 4.471%.
Not really any new observations to share with you...refinance activity remains below average and new purchases are not exactly filling the pipelines of loan originators. Low supply combined with trade flow balance provided by the Fed has kept valuations SUPER RICH...even banks are still buying at these tight yield spread levels.
Below is a shot of my spreadsheet. By my scorecard, in 2010 I have yet to see the secondary market current coupon be more than 70bps over the 10yr TSY yield, nor I have seen the CC move more than 60bps over the 10yr swap rate. These are super rich relative valuations (MBS yields are rich relative to their benchmark's yields). READ MORE ON YIELD SPREADS
While I have outlined a theory that instills hope in the hears of fence sitters and float boaters in the short run, AGAIN I must remind that our overall bias favors higher rates...meaning we view any post-auction recovery rallies in rates as short term at best which leads me to push you to be a "seller into strength".
Plain and Simple: don't let extra bps sit on the table for too long before taking profits on your pipeline....at least not until the market confirms a shift in sentiment.
NEXT EVENT: 1PM AUCTION OF $10billion 10YR TIPS
(UPDATED AT 1:05PM)
Treasury has released the results of the $10bn 10yr TIPS auction. Not much reaction in the marketplace. Here are the results:
10-YEAR INFLATION INDEXED NOTES
YIELDS
High 1.430 pct
Median 1.300 pct
Low 1.230 pct
PRICE/ACCEPTANCES
Price 99.489212
Accepted at high 95.63 pct
Bid-to-cover ratio 2.65
AMOUNTS TENDERED AND ACCEPTED (dollars)
Total accepted 10,000,007,400
Total public bids tendered 26,459,282,100
Competitive bids accepted 9,727,475,300
Noncompetitive bids accepted 272,532,100
Fed add-ons 388,273,200
Primary Dealer Tendered 19,443,000,000
Primary Dealer Accepted 5,462,075,000
Primary Dealer Hit Rate 28.1% of what they bid on
Primary Dealer Overall Award 54.6% of issuance
Direct Bidder Tendered 771,000,000
Direct Bidder Accepted 310,000,000
Direct Bidder Hit Rate 42.9% of what they bid on
Direct Bidder Overall Award 3.1% of issuance
Indirect Bidder Tendered 5,972,750,000
Indirect Bidder Accepted 3,955,400,300
Indirect Bidder Hit Rate 66.2% of what they bid on
Indirect Bidder Overall Award 39.6% of issuance
Dealers took an average amount, direct bidders were slight above average while indirects were below average.
MBS Market Alerts
