Good Morning.

The bond market traded in a quiet environment yesterday with modest profit taking and Treasury auction set-ups serving as the main motivation for flows. In mortgage space, Class A MBS began the settlement process which is why Fannie and Freddie 30 year coupons appeared to have sold off in the afternoon hours. This was not the case. Read this post for an explanation of the events that occur around TBA settlement: Explaining Settlement Day in the MBS Market: Last Chance to Roll.

Mortgage rates have inched slightly higher since briefly touching record lows last Thursday. This "inching" did have a larger effect than usual on the sentiment of consumers because less lenders were willing to quote 3.875% and 4.00% + no point deals were wiped out. 4.125% was definitely still on the table for the taking though. Regardless, the move is well contained within our range on rate sheets and we've witnessed a clear bias to bargain buy the belly of the yield curve and rate sheet influential MBS when they approach the outer limits of their recent range. Buying on the dips is to be expected before the Fed announces their first monthly consolidated asset purchase schedule tomorrow at 2pm and it's part of the reason why I haven't been sounding alarm bells. Nobody panic.

We've seen very light origination flows over past three sessions. This means lock desks are underhedged and we'll need to see secondary managers add some pipeline coverage before mortgage rates retest record lows. Of course that should make it easier for us to call the next dip in consumer borrowing costs. Be sure to listen out for comments such as "LOAN SUPPLY WAS BIG TODAY or LOCK DESKS WERE HEDGING TODAY". This will occur when "rate sheet influential" MBS coupons approach record price highs again and it will signal a pending move lower in mortgage rates.

The day ahead doesn't offer much in terms of new data and information but the bond market must absorb $24 billion 10s by 1pm.  Other than that, President Barack Obama is due to arrive in Indonesia for a 24-hour visit -- if White House officials decide it's safe to fly in given massive eruptions from a volcano in central Java that is spewing ash into the air. Obama will attend the G-20 Summit in Seoul starting on Thursday (Reuters).  The International Energy Agency, which advises 28 developed countries on energy issues, is due to release its annual World Energy Outlook for 2010.

As of 830am...

The2s/10s curve is 1bp  flatter at 214bps wide. The 5-year note is +3/32 at 100-21+ yielding 1.109% (-1.8bps). The 7-year note is +4/32 at 100-25 yielding 1.755% (-1.9bps). The 10-year note is +5/32 at 100-24 yielding 2.538% (-2bps).  The "When Issued" 10 year note is currently bid at 2.539%. Bids are getting hit which implies we should expect to see a modest concession priced in before TSY announces auction results at 1pm. The long bond is the best performer with a 3.5bp yield decline. Overnight trading volumes were light but as reported above bargain buying was seen at the price lows through the belly into the long end of the yield curve.

The December delivery FNCL 3.5 MBS coupon (cash) starts the session +3/32 at 100-16 yielding 3.455% and the FNCL 4.0 is +3/32 at 103-06 yielding 3.519%. I've got the secondary market current coupon marked at 1.1bp lower at 3.487%.  Yield spreads are slightly wider on the spot.

S&P 500 futures are +2.25 at 1222.25. Dow futures are +15 at 11,377.

Commodities are all up after the dollar had a rough overnight session. The dollar index is currently -0.15% at 77.908. Below is a snapshot of global markets...

Key Events in the Day Ahead

10:00 ― Wholesale Inventories are anticipated to jump 0.7% in September, adding to a 0.8% gain a month before. The gains follow increases that began in January, according to analysts at BBVA, who said inventories contributed 1.44% to GDP in the third quarter. While not a major market mover, the index does suggest wholesalers are expecting sales to continue rising. The same index showed sales rose 0.5% in August; this month economists look for a 0.6% advance.

“The ISM inventory index in September increased 4.2 points to 55.6 which implies that wholesale inventories continued to rise in September,” noted BBVA. “We expect that wholesale inventories jumped around 0.7% in September.”

TREASURY AUCTIONS:

  • 11:30 ― $25 billion 4-Week Bills
  • 1:00 ― $24 billion 10-Year Notes

OTHER EVENTS

  • 7:00 NFIB Small Business Optimism Index (Oct) (prev 89.0)
  • 7:45 ICSC/GS Chain Store Sales Index (wk 10/30) (prev +2.0% y/y)
  • 8:55 Redbook Same Store Sales Index (wk 10/30) (prev +2.5% y/y)
  • 10:00 Job Openings and Labor Turnover Survey (Sep)

ISSUANCE

  • Odebrecht, $1.5 bln 10-year [talk mid 6s]; BBS/DB/HSBC/Santander; TBP by 11/10
  • IFC, benchmark deal expected this week
  • IPIC, benchmark 2-part 5s/10s; BAML/GS/HSBS/NBAD/RBS/StanChart