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The Week Ahead: Limited Data Calendar Leaves Auctions, Greece in Focus

The Employment Situation Report is normally preceded by "sideways uncertainty" and followed by noticeable directionality.  But this time around, the opposite is true.  Although there were some fast and moderately large losses on Friday following the report, it could be argued that the "noticeable directionality" took place in the days leading up to the report, and the passing of the report--by the time this week's upcoming Treasury Auctions and European events are considered--will usher in the "sideways uncertainty." 

Case in point with respect to European events, Reuters reports that Greece basically cannot bring itself to accept the terms of their most recent bailout, thus effectively dooming themselves to default and/or EU exit.  Well...  They apparently do have until today:

( Reuters) - Greece's coalition parties must tell the European Union on Monday whether they accept the painful terms of a new bailout deal as EU patience wears thin with political dithering in Athens over implementing reforms.  Technocrat Prime Minister Lucas Papademos put on a brave face on Sunday as he tried to get leaders of the three parties in his government to sign off on terms of a 130 billion euro rescue, which Greece needs soon to avoid a chaotic debt default.  Papademos said in a statement the party chiefs - who may face angry voters in parliamentary polls as soon as April - had agreed measures including wage cuts and other reforms as part of spending cuts worth 1.5 percent of gross domestic product.  But a spokesman for the PASOK socialist party said a number of major issues demanded by the "Troika", representing Greece's EU, European Central Bank and IMF lenders, remained unresolved late on Sunday. 

Bond markets chopped around in a fairly narrow range overnight, in fairly low volume.   The Greece-related uncertainty helped 10yr yields walk in the door this morning abotu half a bp lower than Friday afternoon, just under 1.92.  MBS are opening right in line with those Friday afternoon levels as well.  Fannie 3.5's are currently unchanged at 103-23.  With no other significant scheduled data on tap, a Greek resolution, or lack thereof, is our best candidate for moving markets today.  The economic calendar stays light all week actually, with the only report drawing much attention away from 10 and 30yr auctions being International Trade on Friday. 

MBS RECAP: 2/3/2012

MBS Down, But Not Out Following Strong Jobs Report

There is plenty of play-by-play on the post-NFP sell-off in the MBS Recap.  If you haven't seen those updates already, that's a good place to start, and in terms of where MBS are and what they're doing, there's not much more to say.  So we'll focus instead on the longer term implications, look at charts, and consider the week ahead. 

First off, here's some pictorial accompaniment for today's movement.  MBS turn out to have been relatively drama-free since the initial sell-off, returning to bounce fairly convincingly for a second time at 103-18.

Even if MBS were now to break below that pivot, volume has basically dried up for the week, leaving the big bounces seen in the earlier heavy volume as the more significant from a technical perspective.  To quantify the relative change in volume on the day and since the FOMC statement (last major volume spike), here's a chart of 10yr Futures Contracts volumes, both on the day, and you guessed it, since the FOMC statement:

The biggest pop of activity from 8:30 to 8:40 took 10yr yields precisely to the lower white trendline in the chart below, as if to suggest that 10's should try their luck in this uptrend (the white parallel lines are an upwardly sloped trend channel).  This is the first time I've charted this uptrend, but certainly, it's seen quite a few bounces, not only on the trendlines pictured below, but also on other lines of the same slope (not pictured below because frankly, the chart is crowded enough as it is, but feel free to use your mind's eye to see the other potential locations for the similarly sloped white lines).  Despite the losses, 10's clearly rejected the notion of testing a breakout of the red line.  There's also a horizontal support/resistance pivot point at 1.95, meaning that all three trends are contenders heading into next week's auction cycle.

MBS MID-DAY: Mostly Sideways After NFP-Inspired Losses

Day Ahead: All Eyes On Employment Situation Report

First Friday of the month and time, once again, for The Employment Situation Report, or more specifically, the Non-Farm Payrolls headline.  Both Manufacturing and Private payrolls are expected to have fallen somewhat from last month's report with the 200k headline falling to 150k.  With both stocks and bonds near their best levels in about half a year, there aren't the usual foregone conclusions about a positive report hurting interest rates or a negative report hurting stocks.  Without being overly optimistic about the team for which we cheer, it seems like Treasuries and MBS would have an easier time keeping a bid in the face of threatening data. 

To clean up that hypothesis a bit, let's say NFP comes in between 150-200k, beating the 150k consensus.  Historically, such a result would tend to lead rates higher, but in the current environment where we've seen more of a leveling off in the broad swath of other domestic economic data,  where last month's report printed 50k higher than this month's consensus, and where an unprecedented level of demand for US Treasuries continues unabated until Europe is "fixed," it doesn't seem like a beat that falls in that 150-200k range is the end of the low-interest rate world.  Granted, even a bigger beat would be hard pressed to cause the end of low interest rates, but the moral of this story is the "underlying default positivity," (or whatever you want to call it... we give up) that pervades US Treasuries and even MBS. 

But what would happen to stocks if NFP misses the consensus.  The recent rally in stocks is impressively stable, almost indicative of it's own version of the "underlying default positivity" (Buy American?).  But we can't help but think that the print needs to hit at least 150k (or have some favorable "yeah buts" in the internal components) for stocks to come out ahead tomorrow.  Then again, we're probably setting ourselves up for disappointment by trying to apply logic to equities.  Maybe we should stick with bond markets. 

With that in mind, logic dictates, well... we're not sure.  All we really know is that Treasuries are at the more aggressive end of a flat range or a bullish trend channel.  Either way, left to their own devices with no NFP tomorrow and no Europe, yields would probably bounce higher and MBS prices would probably fall.  So whatever the suggestion from NFP, it will need to speak loudly enough in favor of economic uncertainty if we're to maintain recently achieved all-time highs in MBS tomorrow.  It COULD do this even with a 150k print, but the higher it is from there, the more and more challenging our day becomes, probably. 

There's other data after the 8:30 AM Jobs report (Factory Orders and ISM Non-Manufacturing), but we're not planning on paying much attention to it unless NFP leaves us woefully desirous of additional economic clarification.  On the other hand, for the first time in a few months, it feels like we're heading into Jobs data with the distinct risk of going sideways or weaker, and with less developed speculation/hopes of bond markets strengthening on a lackluster report.

MBS RECAP: 2/2/2012

MBS Rallying At All-Time Highs, Time To Look At FNMA 3.0 Coupons?

We've posed this question almost a month ago (read more...) and the answer is fairly similar this time around.  That said, MBS prices are higher and more time has passed with the broader rates market trading in a reasonably stable range.  These factors (especially the "time passing" part), if they continue, mean that we should indeed expect 3.0 production to continue ramping up. 

Fannie 3.5's have been by far and away, the dominant production coupon for conventional loans for several months.  This is important because it means that lenders would be going out on too risky a limb by offering any rates lower than those that "fit" into 3.5 coupon buckets.  During this time, LLPAs, N/O/O's and the like kept plenty of a market around for 4.0 coupons, not to mention the fact that huge numbers of 4.0 coupon MBS pools are already in existence, meaning there's some point of reference for making a market. 

This notion of "market making" is important to the prospect of lower rates.  If there aren't enough willing buyers and sellers of 3.0 MBS, it's too risky for lenders to go out on limbs to offer those rates.  Especially in the case of 3.5 Fannie 30yr coupons and 3.0 coupons, which were previously unexplored territory.  We saw a long slow fight play out in 3.5s starting in mid 2011 which included some TBA-MBS volume, but was also underpinned by lenders offering 3.5-eligible rates that they then simply held in portfolio rather than sell into the TBA market. 

This same phenomenon can now be witnessed with 3.0's if you're willing to make an inference or two.  It's pretty simple really.  If you're seeing lenders offering rates that are too low to fit into 3.5 MBS coupons, then the 3.0 portfolio production is implied (3.625% or lower).  When you're seeing this in conjunction with historically high MBS prices, it then becomes a matter of TIME, and a bit of chance, until 3.0 production would start picking up meaningfully in the TBA market.  Although you'd see it first based on the "inference" mentioned above, it's now becoming ever-so-slightly perceptible in terms of market-making.

To measure how well-made a market is (i.e. how "liquid"), we can simply look at the difference between what buyers are willing to pay and at what price sellers are willing to sell, aka "bid/ask spreads."  To that end, here's a comparison of bid/ask spreads in the healthy 3.5 market vs the not-nearly-as-healthy 3.0 Market.  As you can see, there's no reason to consider 3.0's are even remotely similar to 3.5's in terms of liquidity, but this is the sort of thing we can sort of watch from afar to measure how well things are progressing, if they progress.  By the time the green line is looking more like the red line, it's much more likely that 3.0 production momentum can be confirmed.

I had a few other charts prepared to discuss, but given the space that's already been occupied, I'll leave the discussion at a minimum and just give you the charts with a sentence each.  Let me know if you have any questions on them.

First up, a simple look at the past few days of rallying in MBS (no major significance to yellow lines, just a bit of a consolidating trend until today's breakout:

Perhaps more significance in the long term chart though.  3.5's look to be effectively taking a "lead-off" ahead of tomorrow's NFP.  If NFP helps rates stay low or go lower, this would look more and more like a pivot point breakout:

Trading is effectively over for today, and perhaps has been over for the past two days for that matter.  Reason being, note the strong connection in the stock-lever.   Econ data hasn't moved things much and stocks/bonds are mostly keeping pace with each other, all within a clearly defined range.

Longer term, today's movements are fairly meaningless.  Each market was already at or near its recent extremes and has simply been holding there until NFP or some exciting and new from Europe either sends these lines back from whence they came or helps facilitate a breakout.

MBS MID-DAY: 2/2/2012

The Day Ahead: Markets Ready To Discount Data As NFP Looms

Domestic economic data is in slightly shorter supply on Thursday after two more robust days.  But what it lacks in sheer number of reports, it makes up for in other ways, such as scheduled Fed buying in Treasuries as well as 3 Fed speakers.  Fisher and Evans are non-voters and generally represent the opposite ends of the FOMC's spectrum of hawkishness, meaning markets are well-able to predict what these two will say.  Bernanke, however, is always a potential mover, and will be speaking tomorrow in front of the House Budget Committee.

Even so, the order of the day may well be waiting for tomorrow's Jobs data.  With the possible exception of Consumer Confidence, we haven't seen much evidence that this week's economic reports have been significant drivers of trade.  Scheduled Fed buying has been one of the most salient causes for movement on any given day, and beyond that, markets seem to have adopted a default bid for Treasuries and MBS until the next economically soothing/bullish "risk-on" European headline suggests a shift.

Both of this morning's reports hit at 830am.  Productivity and Costs, both seen at +0.8, stood at +2.3 pct and -2.5 pct respectively last time.  Economists polled by Reuters are expected Jobless Claims to hold relatively steady at 375k after a 377k reading last week. 

MBS opened just over 1 tick higher this morning at 103-31 in Fannie 3.5's and 10yr yields are currently just under 1bp lower at 1.8212

MBS RECAP: 2/1/2012

MBS MID-DAY: 2/1/2012

MBS Continue To Outperform As Treasuries Level Off

10:24AM (MBS Live) - Bond Markets Continue Weakening After Latest Data. MBS Outperform

Longer-dated Treasury yields continued to climb this morning after the latest round of economic data showed improved construction spending and ongoing, albeit moderate strength in the manufacturing sector. 10yr yields have risen 4 bps since 8:40AM and now stand at 1.84. 

MBS are faring much better by comparison with Fannie 3.5's down only 2 ticks at the moment to 103-26 (all-time highs are only 3-4 ticks higher). We're probably not far enough into the day, nor have we experienced sufficient losses to be concerned about reprices for the worse, but the general, underlying tone at the moment is one of weaker bond markets and stronger stocks. 

Obama is expected to be talking about expanding government refinance initiatives in about half an hour.

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That update from about half an hour ago provides some background to the current state of trading.  MBS continue to outperform, but are a few ticks higher now, currently 103-29, in line with all-time highs.  (incidentally, we've noted more heavy MBS origination this week and looking at the chart below, it seems like a pretty logical time for that to occur given the resistance at all time highs as well as potential trend-channel resistance).

Rather than being on a predetermined path of weakness, 10yr yields have paused the recent trend, are moving sideways, and seem ready to go in either direction. 

While elements of the chart above do give the impression of a connected stock lever, keep in mind that the broader phenomenon of late has been quite the opposite.  The following chart overlays the S&P with 10yr Yields:

There's no real analytical point to this chart other than it could be interesting to some, and perhaps speak to the level of risk aversion in debt markets (i.e. everyone crowded into the biggest, safest sovereign debt).

The Day Ahead: Numerous Economic Reports, Including Controversial ADP Payrolls

Wednesday brings another relatively robust set of economic reports in the morning, but those reports will have to speak fairly loudly in order to be heard over the ear-shattering apathy that's led to default bullish bias for Treasuries.  Sure, Tuesday's Consumer Confidence numbers probably helped the rally lower, but consider that the Fed Coupon pass was going on at the same time, and was largely a bond-bullish event.  It also generated a similar amount of volume for Treasuries as that which can likely be attributed to Consumer Confidence reaction. 

Today's data is especially interesting, not because it's necessarily destined to cause massive market movements, but because it will help settle a bit of a pre-NFP bet.  The bet?  On one side, those who are rooting for a horizontal range generally being dominant for the past 3 months as opposed to the other side, who see things more as a gently sloped bullish trend.  They're both right here in this convenient chart!

Take this chart back further, and the horizontal trends get a lot more pivot-point bounces. But there have certainly been plenty of instances of technical resistance and support around the diagonal trend channel boundaries more recently, and of course MOST recently as potential resistance to further gains.  But is that a market making a calculated move down to the resistance at the red line, or simply some "overrun" past the teal line ahead of significant data?

And now we come full circle to answer the question of why Wednesday will help settle this bet.  Reason: Since NFP will ultimately (probably) have the most to say about which of these two trends is more likely in control, Wednesday's ADP Payrolls are highly informative.  Ok ok ok....  YES!  We're well aware just how angry everyone is about markets trading the ADP figures as if they mean something about where NFP will come in...  Yes... We too, don't much care for ADP as some sort of clairvoyant prediction of NFP.  But the fact remains: over time, the private payroll component shares a higher degree of correlation with ADP payrolls than anything else.  So even though you don't have to LIKE it, you should still be aware that markets will continue to TRADE it with some measure of respect paid to its predictive value, even if that's not much better than a 50/50 shot.

Other data includes weekly mortgage apps, which was out an hour ago and is updated in the table below (weaker).  Construction Spending at 10:00 AM and ISM Manufacturing at the same time.

MBS RECAP: 1/31/2012

MBS Improve After Morning Data, But Underperforming Vs. Treasuries

With the 10:00 AM print of this month's Consumer Confidence report, the morning's economic data is done. Stocks and bonds hadn't been too well connected until then, but the general movement since then has been in favor of lower yields and lower stock prices. S&P futures are down to 1305 at the moment after being as high as 1317 earlier this morning.  10yr yields are trading just below 1.83, and thus have recaptured most of yesterday's gains.



 MBS are a different story.  Whereas 10yr TSYs have merely experienced a measured little move beyond yesterday afternoon's weakest levels, MBS fell all the way to Friday afternoon's prices.  Although MBS prices are certainly making gains with the rest of the bond market, prices are not yet back into yesterday morning's very tight range whereas Treasury yields are.  This can be seen in the following chart.  We've inverted 10yr yields and overlaid them with MBS prices (inverting 10yr y-axis means that the line will generally move in the same direction as MBS since MBS are displayed in Price and TSYs in Yield):



There are all sorts of explanations for the differences in performance between MBS and Treasuries, not to mention the most popular and always the most likely candidate when bond markets are rallying: Treasuries simply tend to outperform into rallies and underperform into sell-offs.  There are other factors at play in the current scenario and all deserve a look.  

From a simple price perspective, MBS hit their all time highs yesterday and have been nudging the upper limits of a trend channel.  Both of these technical factors could add to the sense of resistance at current levels.  It's interesting to note that MBS prices fell far enough yesterday afternoon to get back inside the ongoing trend channel, thus getting daily resistance there while using the horizontal line at all-time highs as intraday resistance.  Both lines are included in the chart below:



Then there's the matter of recent MBS performance vs Treasuries.  Beginning with the inclusion of MBS in the September 21st FOMC Announcement (first mention of "twist"), spreads between MBS current coupons and Treasuries have been getting narrower (MBS yields closer to Treasury yields).  These fires were fueled right through to the new year by speculation of MBS-related QE3's as well as the old cliche "more buyers than sellers."  Seriously though... In this environment with such low Treasury yields, who wouldn't want an almost equally risk-free return?  Demand for MBS has simply been quite strong, and production wasn't able to meet that demand.  So prices rose faster than benchmarks.  Here's a look at the long term spread between Fannie Current Coupons and 10yr Treasuries: