In after hours trading, the FN 4.5 has found stable ground near the middle of its 2 day range. Here is a two day chart illustrating the CHOPITILITY we discussed earlier...
In the spirit of competition and constant debate, each morning MG and I record our hypothetical TSY/MBS trade positions. At the end of each day we compare results. Interestingly enough, we both anticipated that the FN 4.5 would close at 100-19 today. Here's how it looks on the longer term chart. MG calls 100-19 his "secret line". (we both had on steepeners too)
MBS trading volume was below average today. Originators sold less than $1 billion in supply. The quiet environment allowed "rate sheet influential" MBS to perform well against benchmark TSYs and swaps. In more technical jargon: yield spreads tightened. MBS outperformed TSYs!
Considering the choppy nature of the yield curve and continually slow prepayment speeds...it's funny that "rate sheet influential" MBS coupons outperformed TSYs today. The best explanation we can offer is that MBS investors are anticipating that the market will need to buy convexity (current coupon) in the near future. Perhaps buyers are simply putting themselves in a position to serve the needs of accounts who must move down in coupon (out of necessity) if the yield curve rallies? Also...one could point towards today's down in coupon rally as a "buck the trend" trade ahead of Class A settlement, which is looming this week. Or maybe the fact that prepay speeds were once again SLOW played a general role in today's increased demand for agency MBS.
Plain and Simple: today's "down in coupon" buying day was speculative in nature. Perhaps accounts are anticipating a chance to profit from falling benchmark TSY rates? Maybe investors are looking to buy current coupon MBS in hopes they will be able to sell at higher price when settlement approaches (when street is short new production MBS, "rate sheet influential" coupons are in high demand, which implies accounts are willing to pay more to cover short position). Or...it could have been a function of good 'ol prepay protection positioning by real money accounts (when prices get too expensive these accounts must move down in coupon to protect the long term stability of their portfolio).
The latter seems to be the logical explanation...but the other motives likely played a role in today's rally too.
OR OR OR....
Maybe the slow nature of trading made us peer too deeply into our crystal balls today?
All in all it was a good day for mortgages!
MBS Market Alerts
