After receiving worse approval numbers then Aaron Hernandez, Congress has started to get its act together. For the first time since the start of the Government Shutdown Crisis, news broke that lawmakers seemed to finally embrace the idea of a short term extension of the debt limit. While nothing concrete has been worked out yet, we’re encouraged by the fact that the white house has shown support for the 6 week extension presented by House Republicans and expect to see a deal done within the next week. While this deal will still leave the government shutdown, it will avoid the immediate threat of a default, which would wreak havoc on the market. Immediate reaction to this news has been positive overall, with 10 yr spreads tightening and stocks up on the day. This morning saw the majority of Oct shorts cleaned up, as the event-risk premium from a default that was being priced into the 10 yr bond has been priced out again. However, as the announced deal is only a short term 6-week stop-gap, we are seeing this same event-risk premium being priced into the late Nov and early Dec prices which will have an effect on the cost of any back month mortgages being hedged. We have also seen an increase in the net FED Purchases of 3.5 coupons over the past 3 weeks, going from approx. 16% of total purchase volume up to 35% this week.
On the day, the DOW opened up about ~130 pts from yesterday’s closed, and has put on gains throughout the day, currently up ~300 pts @ 15,102.95
FNMA 30 yr coupons opened down about 8/32, but have rallied back throughout the day and are currently trading at yesterday’s Mkt Close level.