It was an interesting morning in the rates world. Let's start with our fearless leader, the benchmark 10 year note.

In below average trading volume, yields rose marginally (at most) in the overnight session before popping higher on the heels of a much better than expected Retail Sales print at 830. After that we noticed some nibbling from real money accounts as 10s hit session price lows (yield highs). This bargain buying coupled with a short covering bid helped push yields lower ahead of the release of Consumer Sentiment survey results, which turned out to be worse than expected at 72.5 vs. forecasts for 73.6.  The reading was however not far from the six month average and much improved from levels one year ago.

Here is a table of the results:

On the surface this data appears to be bond market friendly, which corresponds to the market's reaction. The  3.625% coupon bearing 10 year Treasury note yield fell and fell some more....

However, when taking a closer look, you can see the majority of the dip wasn't timed with the release of the data.  The rebound rally already had its wheels in motion before the release. When the results ticked across screens, there was an additional 1.5 bps decline in yields,  which was quickly tested and confirmed to be followed by a steady move all the way back down to our 3.68 bullish rebound rally target.

I point this out to clear up any misunderstandings about the catalyst for this rebound rally. A lack of meaningful, market moving data made it easy for traders to price in an auction supply concession to the yield curve. The auctions came and went,  demand was strong, indicating no change in overall conviction toward the need for risk averse assets...now traders are testing the market's willingness to re-enter the 3.57 to 3.71 range. THE REBOUND RALLY WAS ALREADY IN MOTION, the Consumer Sentiment Survey just made it easier for flows to head "up the ladder". When you think of it in the grand scheme of things... this survey was just another "status quo" read on consumer confidence whereas  Retail Sales data is more of a "put your money where your mouth" data set. Retail Sales should trump the preliminary read on Consumer Sentiment.

Don't get too excited yet though. Guess what level the 10 yr note is battling....POSITION RESISTANCE! While there was heavy volume accumulation at the price lows of the day...participation faded as prices tested this all important pivot point. If the rebound rally is to gain more traction...the 10 yr contract must break this layer of position resistance.

 Ok. That brings us up to speed on our benchmark big brother. Now to mortgages....

To put it a clearly as possible...rate sheet influential MBS coupons are getting their butt whipped by their benchmark big brother today. After a week of generally stable MBS valuations at VERY RICH levels, current coupon MBS yield spreads blew out this morning. FINALLY!  When I saw this happening I wondered if it was a factor of new loan supply, it wasnt. It was more simple: a collective  "THESE VALUATIONS ARE TOO RICH, I WILL WAIT UNTIL LATER TO BARGAIN BUY" bias. Regardless of the much flatter 2s/10s yield curve (at 274bps vs. 280 yesterday), most of the action has been centered around shorter duration debt, like 15s. Today is Class B (15s) notification day and it looks like there is a short squeeze dominating the roll trade. Other than that there is increased activity in prepay protective specified pools (seasoned) .

In terms of price, the FN 4.5 has traded in a wide wide range today (after trading in a tight one for the past two days). A low of 100-16 was hit early on in the session. Since then, the recovery rally in benchmarks has dragged MBS ask prices  as high as 100-30+. At the moment, the FN 4.5 is -0-01 at 100-27 yielding 4.406%.

Here is the two day to illustrate today's chopatility...testing 100-28.

REPRICES FOR THE BETTER ARE WARRANTED
 

Its worth it to float a few more loans in this environment. Speculatively of course... :-D