"Rate sheet influential" MBS coupon prices rallied higher today as the yield curve continued to flatten.

The October delivery FNCL 4.0 finished the session +05 at 102-16 and the October delivery FNCL 4.5 was bid  +02 at 104-07. The September delivery "phantom" 3.50 MBS coupon went out +8/32 at 100-20. The secondary market current coupon is trading below 3.50% on the street but I've got it marked at 3.628% because I still focus my weighting on the 4.0 coupon.

These price appreciations were not a factor of local buying as much as bids/offers being updated as the yield curve flattened. MBS trading volume was above average but activity was slow in general with only about $2 billion of new production on screens. This loan supply was concentrated in 4.0 coupons, which explains why they continue to underperformed greatly (now +106/10yr TSYs!).  If you're trading the curve check out shorted dated vols...they were up  a few norms.

As noted earlier the yield curve continued to flatten. 2s/10s are now down to 208bps. 204bps is the next resistance level for the 2s/10s curve.

The 2.625% coupon bearing 10 year TSY note was +0-30 at 100-15, down 10.6bps to 2.573% in yield. Meanwhile the 2 year note isn't meandering too far from 0.50% resistance, +0-03 at 100-08, -3.6bps to 0.496% in yiel. This seems to be a stopping point for the short end of the curve and again implies the 10-year will soon run into curve flattening resistance. 

Check out 10s, we are nearing the other side of our PANIC RANGE.

On Thursday I said this rally has gone too far way too fast, but then on Friday positions were added and the curve rallied a little more. This continued today as speculative steepener positions were unwound and forced buying ensued ahead of the Fed's first Treasury operation tomorrow: August 17.  This implies we may be seeing the beginnings of a  short term bias shift on the street (overbought!). With that in mind  I am sticking with my outlook for a near term reversal. This near term sell off would become a reality if S&Ps can rally through 1080, 1090, and retest 1,100.

I doubt we see a duration shedding event with the Fed in the market, but if "rate sheet influential" benchmark yields start to rise mortgage rates have some room to float given the recent uptick in originator 4.0% locks and huge spread widening we've witnessed lately. 

3.5s are still an illiquid hedging instrument, they are more of a playground for fast money traders than anything. This means 4.25% is still the best quote many borrowers will see in this market. I know there are a few lenders offering lower quotes on 30yr loan paper, but those offers are not widespread and the file has to be utterly perfect.