It was a slow session in MBS space but production coupons managed to keep up with the Treasury rally, at least for the first half of the day before fast money profit taking led to a little late afternoon weakness.
"Rate sheet influential" MBS prices rallied higher after the S&P ran into firm overhead resistance and then broke range support for only the second time in the last seven sessions.
The S&P is making a habit of selling off at this technical level. Volume was low into the downtrade but unless this technical resistance is broken, longs will be forced to liquidate and once frustrated longs are washed out, the shorts will go in for the kill. Keep an eye on 1150 in the S&P INDEX and 1145 in S&P FUTURES.
The November delivery FNCL 4.0 went out +0-07 at 102-25 yielding 3.593% (-2.8bps). At 5pm benchmark 10s were +0-09+ at 101-08+ yielding 2.479% (-3.4bps). The 2s/10s curve was UNCH at 207bps wide. TSYs ended up outperforming "rate sheet influential" coupons but MBS held their own against benchmarks, mostly thanks to favorable factors relating to dealer positions, thin trading conditions, and a very very modest amount of new loan supply sales/pipeline hedging (less than 1bn).
While there's still room for prices to run higher (7/32), if you're into playing pivot points,MBS prices are due a reversal. Back month FNCL 4.0s have run into this layer of resistance four times in the past month, each time prices have moved lower. If you're playing the range, lock signals are intensifying.
On Friday I commented on Bill Dudley's speech in two different posts but never offered more detail on what specific comments moved the markets.
"We have tools that can provide additional stimulus at costs that do not appear to be prohibitive. Thus, I conclude that further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long."
I'd say that is a pretty cut and dry....
Tomorrow s/be another slow day. This will give us time to discuss the potential for further QE and take a deeper inside Bill Dudley's speech. IT'S LONG BUT PROVIDES A GREAT RECAP OF THE SITUATION WE'RE IN...