Results of the 7 year note auction just hit the tape to yield 3.078% with 40.3% going to Indirect Bidders. Direct Bidders stayed away, taking only 17.2%. Bid to cover was a respectable 2.98 to 1 with only a .5bps tail. Given it a B and close the book on this week’s financing.
Concerns about a Moody’s downgrade for Greece, Unemployment Claims jumping 22K, and Durable Goods (ex-transportation) falling .6% are not the makings of an economic recovery. Stocks feel the pinch, down 156 points on the big board while the flight to quality trade is on in treasuries (10 year note up 14/32’s). Mortgage backs have followed suit, up 5 to 6/32’s depending on the coupon.
Technically, the chart gapped higher leaving what we call an “island reversal” behind. Bullish formation that typically leads to a full retracement (revisit the best levels set 2/8). That area is only ½ point away in 10 year note trading and if achieved, could boost mortgage pricing by another .125% to .25%. What I’m getting at here is that the market trades well but your risk reward is starting to dwindle. Given the stiff resistance overhead, best to use the improved mortgage levels. Take advantage.