The long end of the yield curve is catching a corrective bid and "rate sheet influential" MBS coupons are tagging along for the ride.
The 2s/10s curve is 6bps flatter at 214bps wide. The 10 year TSY note is +18/32 at 101-02 yielding 2.502% (-6.5bps today). Also catching a corrective bid is the 5 year note, which is +10/32 at 100-19+ yielding 1.125% (-6.3bps). Positive price appreciations have been led by real money bargain buyers and fast money spread speculators. Trading volume is below average with the majority of flows hitting the tape after Industrial Production/Capacity Utilization data...
Here is a recap of Industrial Production and Capacity Utilization data...
18Oct10 RTRS- SEPT INDUSTRIAL OUTPUT -0.2 PCT (CONSENSUS +0.2 PCT) VS AUG +0.2 PCT (PREV +0.2 PCT)
18Oct10 RTRS- SEPT CAPACITY USE RATE 74.7 PCT (CONS 74.8 PCT) VS AUG 74.8 PCT (PREV 74.7 PCT)
18Oct10 RTRS- SEPT MANUFACTURING OUTPUT -0.2 PCT VS AUG +0.1 PCT, CAP USE 72.2 PCT VS AUG 72.3 PCT
18Oct10 RTRS- SEPT MINING OUTPUT +0.7 PCT (AUG +1.6 PCT), UTILITIES OUTPUT -1.9 PCT (AUG -1.4 PCT)
18Oct10 RTRS- SEPT INDUSTRIAL OUTPUT EX CARS/PARTS -0.3 VS AUG +0.5 PCT
18Oct10 RTRS- SEPT MOTOR VEHICLE ASSEMBLY RATE ROSE TO 8.00 MLN UNITS/YR FROM AUG 7.90 MLN
18Oct10 RTRS- U.S. Q3 INDUSTRIAL OUTPUT +4.8 PCT VS Q2 +7.0 PCT, CAP USE 74.7 PCT (Q2 73.8 PCT)
The recovery rally in the benchmark TSY market and a modest down in coupon bid from real money accounts, servicers, and fast money spread speculators has helped pull production MBS coupon prices higher this morning.
The December delivery FNCL 3.5 coupon is +12/32 at 100-25. The December FNCL 4.0 is +10/32 at 103 the rock. I've got production coupon yield spreads wider into the bull flattener.
A bearish continuation pattern is in process. This technical formation is indicative of lower MBS prices. The yellow lines represent the range we are playing in 3.5s. The move outside that range reflects a QEII sugar high....which is now in question. READ MORE
Plain and Simple: we are in the midst of a downtrend in "rate sheet influential" MBS prices spurred on by rally exhaustion and the pain trade in benchmark TSYs (following Bernanke's cautious words on QEII).
Loan pricing is slightly better today than it was on Friday morning. On average, lenders improved rebate by 5.4bps (compared to the first round of reprices but not the late afternoon recalls). Week over week loan pricing is 69bps worse, however it should be noted that rebate offers last Monday were basically the most aggressive indications we've ever seen.
From Mortgage Rates: Play the Range Until Bernanke Plays You
If you're riding the float boat and starting to get a little sea sick, I don't feel now is the time to jump overboard. The Fed is planning another QE program and they've made it clear they intend to keep monetary policy extremely accommodative. The environment might get a little choppy over the next two weeks, but in the end I believe the Fed will announce a program that will be supportive of record low mortgage rates.
November 3, 2010 will be the date....if the Fed is to keep their credibility.
PLAY THE RANGE UNTIL BERNANKE PLAYS YOU
Plain and Simple: As expected, the long end of the yield curve and "rate sheet influential" MBS coupons are seeing an uptick in demand near the price lows/yield highs/spread wides. This implies recent bond price action hasn't been a factor of fundamentals as much as it's been a funtion of a over-crowded bond trading environment (the pain trade is in motion). Real$ bargain buying and levered day trading tells us investors still anticipate another Fed QEII program. Unfortunately until the Fed provides further guidance on another QE program, the pain trade may continue to play out....making floating in the short term more risky.
Rebate is a little lite relative to MBS price movements today so you might be seeing reprices for the better soon...