Benchmark TSYs and rate sheet influential TBAs are continuing their consolidative ways today.  

I describe this behavior as the market "storing energy" --- energy that can be detrimental to pipeline hedges when released. It was after all the release of stored energy that led production MBS coupons on their record breaking run earlier this month. This is evident in the chart below...

Since setting new price highs on June 1st  we've whipped around a range that seems to be shrinking. Although we haven't seen a breakdown in support levels, we're not getting  sustained positive progress either.  One day prices go lower, the next they go higher only to move lower the day after. Yet technical support continues to hold. We're consolidating around a pivot. It's like no one is willing to commit to a rally or a selloff. It's like the market is waiting for guidance that either justifies the rally or confirms capitulation.   

What's next?

Stored energy will be released and when it happens the move will be intense.  It's just a question of in what direction and when. If you're looking to attach a directional bias to your breakout considerations, remain focused on European bailout events (Greek elections on Sunday) and next week's FOMC meeting (where QEIII hints will be discreetly disclosed).

Headline risk is huge. Batten down the hatches, get with your processors, talk to your underwriters.


Bill Berliner of Manhattan Capital Markets, the sponsor of this blog channel and pipeline hedging consultant, has provided deeper insight on the topic...

Managing pullthrough is one of the most challenging aspects of a secondary manager's job.  Traditionally, pullthrough has been managed as an interest-rate option of sorts, which means that pullthrough rates are highly correlated with mortgage rates.  Over the past five to seven years, however, credit-related factors have increasingly determined whether or not loans ultimately fund.  This has created a lock-in effect of sorts; borrowers with pending applications are increasingly reluctant to let their applications lapse.  This is especially true for applications that are progressing through lenders' pipelines. 

This is not to say that changing mortgage rates don't impact pullthrough rates-they clearly do.  However, the nature of the sensitivity of pullthrough to mortgage rates changes as applications progress through the credit process.  This means that pullthrough modeling involves calculating a pipeline's sensitivity to interest rate changes, credit, and the timing of applications moving through the various underwriting stages.

Correctly estimating pullthrough rates is extremely important to the hedging effectiveness of lenders, especially during periods of market volatility.  As an example, look at the below history of Fannie 3.5s in early April.  Over the course of six trading days, prices fluctuated wildly between the low 102s and high 103s. 

A lender with a $100 million pipeline that used a pullthrough rate 2% higher than their experience could have lost up to $30,000 on their position in a few business days.