Loan Biz Blog

As we head into the last half hour of trading, price action has been a one way affair and looking to close at the worst levels of the day. Mortgage backs are now off over 1 point as the 10 year note trades a 3.85% yield (down 43/32’s). Just for good measure, the 30 year bond is off over 3 points. This has been one of the more dramatic down drafts we’ve seen in some time, reminding us of just how powerful and heartless the market can be. I have attached the 60 minute 10 year note futures chart. One thing I’d like to point out is that the market traded 3 handles today, 117, 116, and 115. This is powerful stuff and is rare to see. It also tells us that the masses have abandoned long positions (owning treasuries) until higher yields make re-entry more worthwhile. Next point I would like to make is that we took out the longer term trendline dating back to December 2009. That sliced through at 116 16. After making a low (115 28), the market rally that followed was meager (12/64th) in what traders call a “dead cat bounce”, only to slip to the lows as they turn off the lights. With trading volume 140% of normal, this is not a low volume volatility trade. This move is for real. Our work suggests that the market is headed for the February low at 115 14 (yield of 3.91%) before any recovery rally will occur. That could easily happen as a result of the 7 year note auction tomorrow. 32 billion of this odd ball duration will be on the block. All however is not lost. Once we take another beating and auction the paper, our target objectives should have been met. At that time, the market will reassess and most likely find value given the higher yields. One big reason is something I mentioned a few days ago, the Barclays Monthly Fixed Income index. With duration add needs of .16 years (in English this means fixed income funds must buy treasuries, etc.), the big boys will turn buyers late this week or most likely early next week. That will give you a rally to the bottom side of the trend line (on the chart) I talked about earlier. If you have borrowers who have not locked, that will be the best spot. Going forward, this is quickly becoming a sell rallies market so use that mantra in your pipeline management. This should look better in a few days so hang in there.

Market Update - Poor Auction 12:09 PM

5 year notes hit the block at 2.605% with 39.7% going to Indirect Bidders. Bid to cover was 2.55 to 1 and the issue had a T-Rex type tail of 4 bps. To say the least, the bond market did not like it. Mortgage backs off a minimum of 20/32’s and the 10 year is off 40/32’s. The light at the end of this tunnel is Burlington Northern.

Market Update - Slip Sliding Away 11:44 AM

“You know the nearer your destination, the more you’re slip sliding away”. Paul Simon’s lyrics seems fitting today as the market continue to press lower. Maybe it’s that traders are seeing a poor 5 year note auction in the making or maybe it’s just profit taking. No matter, the 10 year note is now off 1 point and mortgage backs are off 15/32’s. Fingers crossed for a good auction results due out in 15 minutes. Careful out there.

Market Update 10:29 AM

Sorry about the lack of market update info yesterday but my multi tasking skills were put to the test, setting me up to fail on delivering you the goods. While yesterday was a ho hum, mainly flat day, Wednesday’s trade has been anything but. It all started across the pond as Germany’s Business Climate Index jumped a few points and Euro zone PMI Indexes (services, manufacturing, and composite) all came in on the plus side. On the flip side, Fitch downgraded Portugal as another one of the PIG countries struggles with its debt. Durable Goods greeted stateside traders at plus .5% while the ex-transportation component was plus .9%. Both were a touch below consensus. Weakness in Durables can be traced to New Home Sales which fell 2.2%, setting a new record low (308K units annually). All of the above has pushed the 10 year note towards the bottom of the range, down 22/32’s to yield 3.77%. Mortgage backs have fared better with spreads tightening (Fed taking 1.25 billion out of the market) but are still off a smooth 11/32’s. Stocks complete the sea of red hat trick, off 20 points on the big board. While the economic data is seen a net neutral, the technical set up on the chart looks more like a pit bull. Reason being is that the selling today has sliced through the trend line that has restricted the downside (acted as support) since December 2009. Couple that with bearish oscillators kicking in and a breach of the 40 day moving average and you have the makings of the “perfect storm”. Today’s day end close will be very important. We need to hold 116 22/64th on the futures chart (yield equivalent is 3.75%) to feel better about the range trade continuing. With current levels at 3.77%, the market needs to boot strap itself back together or further downside (worsening mortgage pricing) will occur. 42 billion in 5 year notes (today’s auction) could be the key. Yesterday’s 2 year auction was a dog, giving traders suspicious minds about the outcome of today’s 5’s and tomorrow’s 7’s. Good participation will go a long way to helping our cause. Given the way we ticked off the Chinese lately, that is not a given. Keep both hands on the wheel. We’ll update you on the auction results (12:00 cst).

With Permission & Courtesy of Scott S. Eggen
Senior Vice President – Capital Markets

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Sam Cowen, NMLS ID#: 176693
Branch Manager, Lending in 47 States
PrimeLending | a PlainsCapital Company
2007 N Collins Blvd Ste 403 Richardson, TX 75080
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