10-yr 3.57% (+ 8 bps)
MBS: -10/32 (-31 bps)
Stock Markets:
DOW -104 at 9,867
S&P - 13 at 1,067
NAS - 13 at 2,142
Economic Calendar:
Tuesday, October 27, 2009
Durable Goods @ 8:30am – Moderate Impact Case/Shiller Home Price Index @ 9:00am – Moderate Impact
Consumer Confidence @ 10:00am – HIGH ImpactDurable Goods @ 8:30am – Moderate Impact
Two-year note auction @ 1:00pm – HIGH Impact
Wednesday, October 28, 2009
New Home Sales @ 10:00am – Moderate Impact
Five-year note auction @ 1:00 – HIGH Impact
Thursday, October 29, 2009
Quarterly GDP @ 8:30am – HIGH Impact
Weekly Jobless Claims @ 8:30am – HIGH Impact
Seven-year Note Auction @ 1:00 – High Impact
Friday, October 30, 2009
Personal Income @ 8:30am – Moderate Impact
Personal Spending @ 8:30am – HIGH Impact
Chicago PM survey @ 9:45 – Moderate Impact
Univ. of Michigan Consumer Sentiment @ 9:55am – Moderate Impact
Market Commentary:
Stock markets remained weak the remainder of the day after starting on the positive side. Treasuries and MBS also remained weak closing on their lows of the day and holding in place the price worsening conditions that we started with. Secondary market mortgage pricing worsened by .250 overall today with 30-year products edging close to .375 price worsening.
What happened? There was no news that drove the markets today and we saw stocks sell-off in response to strengthening in the U.S Dollar today. Stocks had also touched technical highs – once again testing and failing to breakout.
Treasuries and MBS traded on their own today. You could typically expect to see some movement to bonds on a weak stock market, but the selling that we began the day with held tight as the day unfolded. Additionally last week there were rumors that the Fed may tweak their semantics on the next statement to suggest that the Fed would be ready to nudge rates higher at the first signs of inflation and stable economic growth. By the way, we don’t see much of that yet as unemployment and a weak consumer will continue to weigh on a recovery. But, the Fed could also be testing the markets reaction as they are also set to unwind their treasury purchases that have been helping to support the low mortgage rates.
Bonds broke resistance we have seen hold since August and now sit right on a very small technical resistance level of 3.57% in the 10-year TSY. The next level of support isn’t until 3.70 to 3.80% levels… so as we have been recommending for weeks – stay defensive.
Bonds have tended to weaken like this as bond traders hedge ahead of treasury auctions like we have this week. If those bond auctions go well – as anticipated – we could get some near-term relief. But, all of that will be weighed by traders against the avalanche of economic news this week as well.
The stock markets were lead lower by financials with the large banks- namely Bank of America- selling off early and hard. The compensation control rhetoric along with weak loan portfolios continue to weigh on the banks..
P.S. As we watch the after hours trading, MBS continue to weaken slightly setting up more price worsening in the morning if that trend holds through 9:00am ET. Stay tuned for our Pre-Market Alerts.
Pricing Conditions/Direction: Negative
Even with a weak stock market, conditions are negative ahead of the treasury auctions and economic news coming this week.
Float/Lock Recommendation: Lock Bias
We have been, and continue to recommend caution and an overall defensive strategy toward float/lock in this environment. With the very low historical mortgage pricing, one should continue to bias toward locking unless we alert you to improving conditions. Given the potential volatility of breaking out of the current range (for the worse), the risk/reward balance still favors a lock bias.
However, the aggressive float/lock strategy we have been describing could still be played on small positions in the pipeline (or new apps today) by those with a strong constitution and appetite for risk, as the technical’s setting it up are still in tact – albeit hanging on by a thread at the moment. With bonds now in a technical oversold area, this play is setting up the opportunity to play this ultra-aggressive float strategy once again.
There has been a trend setting up that has been fairly reliable to play in a range of .250 to .375 rebates over the last 60 days.
Here’s how you would play this opportunity for now… when you see treasuries approach 3.45%, you could bias to float in anticipation of the sell-off with yields dropping to the lower end of the range of 3.32%.
So, with the 10-year TSY closing outside of the outer band of this range tonight, one could now float light positions in anticipation of the pullback below 3.48% and toward 3.32%. The current outer bands of the range are 3.30% to 3.48%.
One thing about ranges and trading within the bands- it works until it doesn’t, so we would recommend staying very close to the markets and our emails/alerts if you decide to take this strategy. It is an aggressive strategy, but if we see stocks stall or weaken additionally here, along with strong treasury auctions this week, this recent trend could hold and you could pick up .125 to .375 in pricing improvement over this evenings pricing by playing for the retracement in bond yields. Any convicted moves in treasuries outside this band could be a break in near-term direction.
As we say with this strategy, stay very close to our emails alerting you of worsening conditions that would take this play off the table.
As we say with this strategy, stay very close to our emails alerting you of worsening conditions that would take this play off the table.
There are still technical reasons to be cautious while floating:
- We still have a lot of earnings being reported that could swing the markets
- The economic calendar is loaded with impactful data this week
- The 10-year TSY is now testing a technical breakout to much higher levels.
- Corporations continue to beat Q3 earnings estimates
- Economic has been and remains to come in relatively positive.
Bond traders appear to be setting up their positions ahead of new treasury auctions next week and have a bias to hedge higher yields and mortgage pricing at the moment. We do tend to get some bond selling (higher yields) as we approach these auctions.
The Technical’s:
The overall trend still remains constructive and bullish for these very low historical mortgage prices, and the very positive historical mortgage pricing environment remains in tact. We still see mortgage pricing staying within a tight range of 5.00% to 5.50% for the 30-year fixed in the near-term.
The macro-range for the 10-year TSY is about 3.30% to 3.80% and we are sitting in the middle of that range with a bias drifting upward to the highs – while we spent late summer and early fall in the lower end of the range. We don’t see anything on the tape yet that would suggest a breakout above 3.80% soon. Within this range, mortgage pricing would stall at 5.50% for a 30-year fixed if we started to test the highs on this macro-range.
The 10-year ran up to 3.57% to test a breakout of the 100 day moving average. As we have said for a few weeks now, we could get near-term bullish on mortgage pricing if stocks weaken here and we see the 10-year trade back and through 3.48% with conviction. If this scenario played out we could see the 10-year drift to 3.32% relatively quickly.
However, we don’t see that trend setting up at the moment just yet. Rather, we are seeing the 10-year testing a breakout of the recent range of 3.32% to 3.48% and bond traders will take their queue from the stock markets and economic news to find the next direction and range. If stocks and corporate earnings remain positive, we would likely jump out of this range on bonds and mortgage pricing.
Stock investors are still consolidating some of the recent gains over the last few weeks. If the economic news and corporate earnings continue to come in positive, we could see the S&P run up to the 1,125 to 1,179 range and push mortgage pricing significantly higher from here. It would take continued good news and a weakening US Dollar, though, as stocks look ready to take a breather after making the big recent gains. However, if the S&P closes lower than 1,076 again tomorrow (after closing at 1,067tonight), that could be a signal of at least a near-term pullback in stocks and setting up positive moves in mortgage pricing.
We are near-term and technically bearish on mortgage pricing conditions as corporate earnings continue to look good and the economic news continues to look better. Although, it will take a lot of momentum for stocks and bonds to break the current range.
Trends: Last Ten Closing Prices
10-yr TSY 3.57% 3.49% 3.42% 3.38% 3.34%
MBS 100.06 100.15 100.27 100.28 100.30 100.28 100.23 100.12 100.26 101.07
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