Good Morning Good Morning Good Morning. Happy Earth Day. President Obama has an Earth Day message he wants you to read. CHECK IT OUT.
After you peruse that proclamation, President Obama would like you to tune in later today to watch him shake his finger at Wall Street. In a speech Thursday, the president will counter what he calls “the furious efforts of industry lobbyists” trying to weaken or kill new and tighter regulation. READ MORE
I just heard CNBC say stock traders know bond traders are smarter than them....hahah yeh CNBC!!! Liar's Poker...
You may have noticed there is a pep in my step today. Although I am planning on going for a bike ride later, it has no relation to Earth Day. This is why I am in such a good mood:
That puts us up 3-1 in the series. One more to go and we move onto the next round.
Ok enough off-topic content. Lets play catch up to ensure your perspective is in-line....
After meandering all the way up to 4.00% at the end of Q1 2010 (slow flows, lack of liquidity, don't catch a falling knife), technical momentum shifted in favor of the bulls as bargain buyers grabbed extra yield and we made our way back down to 3.82%...but failed to make much more positive progress after that.
Last Friday a Goldman Sachs tapebomb "flight to safety" helped rates rally past 3.80% resistance, but that didn't stick. The 10 yr note ticked back over 3.80% on Monday and even poked and prodded at 3.84%.
The past two days we've watched unbiased sideways trading generated by weak long/weak short prop desk positions, but the bond market made an originator friendly move yesterday.
The 10 year note yield fell 5.4 basis points to 3.743% and the FN 4.5 rallied 8 ticks higher to 100-15. While "rate sheet influential" MBS failed to keep up with the benchmark rally, the secondary market current coupon yield fell enough to allow a few lenders to reprice for the better (coughWELLScough).
The most obvious development was the FLATTER YIELD CURVE. Specifically, the short end of the curve didn't rally along with the long end. I WONDER WHY...oh yeh, the Treasury Department will announce 2s/5s/7s plus some TIPS today. Auction supply has been a prime source of motivation for bond traders over the last year. It was again yesterday. The short end of the curve must absorb the majority of supply. Check out that flattening action....
While the flatter curve reflects an auction supply concession, I must say I am having a hard time figuring out why it occurred in such a bullish manner. What reason did 10s have to rally 5bps lower yesterday?
The only explanation I can come up with is an extension of bullish biases. All along, since hitting 4.00%, we've been targeting a test of 3.71%...the exact middle of the 3.57 to 3.85% range. A lack of resistance seems to have carried 10s closer to 3.71% yesterday. Now we must confirm this move...our first opportunity comes today with JOBLESS CLAIMS, PPI, AND EXISTING HOME SALES
JOBLESS CLAIMS
In the week ending April 17, the advance figure for seasonally adjusted initial claims was 456,000, a decrease of 24,000 from the previous week's revised figure of 480,000. The 4-week moving average was 460,250, an increase of 2,750 from the previous week's revised average of 457,500.
NOT SEASONALLY ADJUSTED INITIAL JOBLESS CLAIMS: 431,740
Initial claims were essentially "on the screws". Continued Claims fell to 4.646 million from 4.686 in the previous reporting period. This decline did not match economist forecasts. Emergency benefits fell by 508,187 and extended benefits rose 28,628.
PPI: PRODUCER LEVEL INFLATION
The Labor Department said the seasonally adjusted index for prices paid by producers increased 0.7 percent following a 0.6 percent drop in February. Analysts polled by Reuters had expected producer prices to rise 0.4 percent in March. Compared to March last year, producer prices increased 6.0 percent, the largest advance since September 2008. The year-on-year increase in March was a touch above market expectations for a 5.8 percent rise. Stripping out volatile food and energy costs, core producer prices rose 0.1 percent last month, after February's 0.1 percent gain. The core index had been forecast to rise 0.1 percent in March.
HERE IS THE BIG NEWS: 70% OF THE MARCH PPI INCREASE IS ATTRIBUTABLE TO A JUMP IN FOOD PRICES
That puts the FOMC in a tough spot. The perception of inflation is forcing producer costs higher. These costs will either be passed along to consumers or producers will have to cut costs to compensate for lost profitability.
Existing home sales just printed: BETTER THAN EXPECTED at 5.35 million (vs. estimates for 5.28 million). The tax credit effect is taking hold (with a weak grip).
So to recap. Jobless Claims as expected. Producer level inflation warmer than anticipated led by rising commodity costs. Existing Home Sales improve thanks to a push from the tax credit. In the here and now, this is more bond bearish than bullish. In the big picture I see nothing in any of this data to imply a structural shift in the macroeconomic environment. BLAH BLAH UNCERTAINTY BLAH....
RATES ARE STILL RALLYING!!!
The 3.625% coupon bearing 10 year TSY note is +0-12 at 99-08 yielding 3.716%.
WE HAVE OFFICIALLY HIT OUR 3.71% TARGET
The FN 4.5 MBS coupon is +0-02 at 100-17 yielding 4.443%. The secondary market current coupon is 4.427%. The current coupon yield is at its widest spread levels vs. benchmarks since the knee jerk reaction seen when the Fed exited the mortgage market in late March. The CC is +70.9bps/10TSY and +71.5bps/10IRS.
This is what we mean when we say" Even if TSYs rally, mortgage rates will not keep up"...
I show BoA better, Chase better, Citi worse, GMAC better, and Wells worse.
REPRICES FOR THE BETTER AROUND 100-23
REPRICES FOR THE WORSE AROUND 100-10
TSY supply at 11am. Obama on FinReg Reform in the next two hours. Our target as been hit...I see no reason to leave all positions open at this point, we are "locking in at the price highs"