Ah, the dead cat bounce!  The term doesn't exactly apply to our situation this morning (as it's more of a long term analogy), but who doesn't like morbid analogies on a Tuesday morning?!  Usually, we are using the term to refer to an unexpected rally in stocks following a significant selling pattern.  But this morning we have to ask ourselves if MBS are the dead cat today.  The cat fell out of the tree for sure following news this morning, but we've seem to either hit a branch, or the ground, and only time will tell.

In other words, the price curve has pared over half a point in YSP in 24 hours and in the process of precipitously falling this morning, it has paused, and we wait with baited breath.  Either this pause is the actual ground, meaning that we are done selling off for the day and may settle a bit, or it was a branch, and we have farther to fall (maybe the analogy should have been Wile E Coyote).

First of all, Who Shot Our Cat?

The Producer Price Index (PPI) report certainly made a loud boom, but is it all bark and no bite?  The consensus was for a .5% overall increase and the actual reading was a whopping 1.1%!  The PPI is a gauge of inflation, so the higher it is, the worse of an indicator it is for mortgage bonds, which devalue concomitantly with the dollar. 

The mitigating factor (no bite?) is that the core reading which excludes perennially volatile food and energy costs came in dead on with the consensus at 0.2%.  So it's a tougher hand for traders to play.  Are things more expensive?  Yes.  But is most everything else just as expensive as we thought?  Yes.  So is there inflation?  Yes.  And is there an absence of inflation?  Yes. 

With mixed data like this, combined with some of the other headlines I'm about to share, market forces can shift away from pure logic and into a mode of emotion and momentum.  In other words, if a panic sets a selling pattern, that momentum can scare up more selling.  But perhaps opportunists view it as short lived, so they buy perceiving a bottom, this bounce can catch momentum and send us right back up. 

Now, in a market such as MBS, it's not quite that same "day-trading" mentality existent between stocks and treasuries, but they are nonetheless part of that bigger picture even if they don't always move in concert with treasuries.  The moral of the story is that the data alone does not give us a clear indication of what will happen the rest of the day.  We don't know how traders will continually refine their interpretations.  So all we can do is watch and react.  Well, not entirely, we can set "if-then" rules, so you can make an informed decision based on your own viscera. 

The Shooters on The Grassy Knoll.

1. Empire State Manufacturing Survey.

      This came in almost comically higher than expected.  No polled analyst even guessed this high.  The consensus was for a minus 22 reading and we hit 0.63%, just on the sunny side of growth vs. contraction.  This bullet undoubtedly must be taken seriously by MBS as it is not only bullish news for the enemy (stocks), but it also mitigates some of the fallout from last month's worst-ever reading.  Full Story.

2. Crude Oil Futures are currently at 113 per barrel.  Very inflationary stuff there!  Another potent piece of ammunition gunning for fixed income securities.

3. Delta / NW merger.  That's right, another arranged marriage.  Whether it's bad news or good news, it's certainly big news, and the biggest airline in the world by far.  Full Story.  (links today, by the way, to keep things short on such a big news day)

4. Johnson and Johnson came out with good earnings relative to estimates, a silver lining to a cloudy horizon for earnings season--a feather in the cap of stocks and another shot fired at bonds (this is hardly a pellet-gun though)

5. Foreclosures are up 60% in past year.  Full Story.  This is not news to the bond market, but interesting "buzz" that may detract somewhat from quality perception of MBS.  In other words, this is very old news to mortgage bond traders, but the problem foreshadows another problem.  The more foreclosures, the more prices are driven down, so the assets that are securing the mortgages that are backing MBS are less valuable.  Ipso, ergo, therefore, MBS has pressure to become less valuable.  Again, this is not a major consideration for the MBS market today, but there is an echo of a gunshot here as well.

Is it over yet?

Sure, there is some other news we could discuss, but these are the most salient impactors today.  And they have served to bring the 5.5% coupon, not nearly to it's knees, but certainly it is stooped, currently at 101-15 and falling.  Expect rates at least .375 worse than yesterday, and likely lenders will price on the come and take even more than that away from you.

Hopefully the lock advice from yesterday was well-received, not that we couldn't be surprised with a turn around, but yesterday morning was the time to lock.

So how to play the rest of the day and week?  The CPI report tomorrow is even more important than the PPI.  The PPI foreshadows the CPI, but not always in exact proportion.  The great news for you is that factors are limited today that would cause the 10 year treasury and MBS to move in opposite directions.  basically, there is only 500 million dollars of "originator supply" today (meaning only 500mil in new MBS are being brought to the market from lenders).  So the rest of the activity is based on current holdings, and thus can mirror treasuries in the absence headline risk.  In case you were wondering, 500 million is a very low originator supply for a day.  I know this point is a bit abstruse, but it is important to understand the "WHY" when MBS and treasuries are similar.

So that means you can gauge reprice risk with the 10 year treasury today (probably).  I will certainly be floating as the market tends to price on the come in these situations, as previously discussed, meaning if we simply hold steady here and don't even improve, that we will see reprices for the better this afternoon.

The caveat is that if we don't improve, we must have lock sheets filled out, on the fax, with the number dialed, ready to hit send as soon as we see bond yields rising.  The reason I make such a point out of the 10 year treasury today is that I am recommending a float in volatile situation.  I don't want you to float and get burned because this site does not (yet) offer instant alerts.  I think our chances of a rally in MBS are fair to strong, but again, time will tell.

Until then!