We've been talking more and more about the "paradigm shift" occurring in the broader markets. In general, mounting evidence suggests that the equities markets have priced in an inordinate amount of positivity with price movements of the summer and late fall. Thus we find even as economic data continues to point to an end to the chaos that has typified the recession, the positivity of that data has not been enough to create more meaningful gains in stocks or to sap the recent positivity of the bond market.
After the precipitous improvements in bond prices over the past few weeks, and indeed since August, bonds have been to hold ground admirably despite some equivocal economic data. This seems to suggest that the bond market is happy at it's current levels with the 10yr within about 20bps of 3% and MBS within five eighths of a point of their all time highs. That's something that adds up to be quite good for mortgage pricing at the moment, but when combined with clues from recent price action, provides a hint about how you can be playing your pipeline strategy for maximum profit and minimum stress...
The all time closing highs for the 4.5 coupon in the chart above are the first part of the "hint" referenced above. The next chart will add the rest of the graphical support for today--though there is support that we can discuss from other factors. Additionally, any time we highlight "all time highs" on an intraday chart, natural curiosity arises as to how those all time highs occurred in the big picture. Fortunately, both the aforementioned necessities can be accomplished with the same chart:
Ok, there's a lot going on here and I'm even going to ask YOU to participate as opposed to simply providing our thoughts. Nonetheless, I will get you started with what I think are the essential background that inform our Post-Paradigm-Shift Gameplan. I shudder to add another abbreviation to the deluge of 08 and 09's alphabet soup, but feel free to call it the PPSG if you like. With that, I'll outline some prelimary thoughts and then solicit your opinions. We'll come back to everything in one of the later posts today depending on participation (so naturally, the more comments and thoughts we get on this, the sooner we can discuss the implications... Get those comments in people!).
Background thoughts on PPSG
The 4.5 MBS coupon has touched 102-07 THREE times: twice in the more distant past, and once in the most recent trading session. The thrust of our argument will be that prices are intensely resistant to closing over this mark from here on out. And though this leaves significant room for price improvements, especially on rate sheets as primary/secondary spread tightens, it gives us a great range within which to time our locking and floating decisions. But all of the above thoughts on taking such positions are worthless if we don't understand even more about why we might be taking them, and explore additional reasons why such levels are important.
The most simple way to discuss those levels would be as the new range-high that encourages a shift of your pipeline hedge ratios in favor of locking, ASSUMING of course that lender rate sheets have reflected enough of those gains (which, as discussed above, can easily be measured by comparing them to the best rates you've ever seen from that lender). Of course this is also contingent on the degree to which the "bottom" of the range (which may require more substantive support or even "discovery") holds steady in the coming days. If we know that prices hit this level twice in the past and we then saw them abruptly turn around PRECISELY at that level during a euphoric, bullish, and somewhat emotional rally on the heels of economic data that may be inducing a paradigm shift, we can conclude that wherever the paradigm shift might leave us, it does NOT leave us in BETTER position than the few very best epochs of MBS history.
That makes sense right? With plenty of Fed buying left to go, SIGNIFICANTLY worse economic data releases that were continuing to deteriorate, SIGNIFICANTLY lower benchmark yields, and a SIGNIFICANTLY higher amount of uncertainty surrounding prospects for recovery, how could we reasonably expect MBS prices to actually move HIGHER NOW when data deterioration has decelerated (and even reversed in some cases), benchmark yields are much higher, and the consensus about the scope of recovery is much better developed? That's right, we of course cannot.
Knowing that, the lock/float information is fairly intuitive. As always, we're looking at two key factors
- How close are we to the extremes of a recent range ( with additional minor considerations paid to "how long we've been near them" and "under what conditions did we approach them")
- How much of those gains in raw MBS prices is making its way to your rate sheets
The longer we've been near those highs, the slower we got there, and the more justified the apparent reasons for the rally, the more we can consider those price levels a true reflection of market sentiment. If that happens to coincide with rate sheets offering similar rates to their all time best levels, then the safer assumption would seem to be that we're again looking at one of the best opportunities to lock in the history of forever. UNTIL/UNLESS PRICES SHOW THE ABILITY TO MOVE MEANINGFULLY ABOVE ALL TIME HIGHS, AND UNLESS THAT COINCIDES WITH WHAT WE CAN REASONABLY BELIEVE TO BE BETTER UNDERLYING MARKET DATA, THERE'S NO REASON TO MANAGE YOUR PIPELINE WITH THAT POSSIBILITY RANKING AS ANYTHING MORE THAN AN OPTIMISTIC HOPE.
So without further ado, here are the group discussion questions I'd like you to consider and comment on. Some are already answered by my opinions in this commentary, but replacement or rephrasing of those opinions in your own thoughts/words is greatly encouraged. SO... What Do YOU THINK?
- In conjunction with with previous two bounces at 102-07, what does Friday's intraday bounce off that level mean?
- As the 2nd chart shows, there's a LOT farther to go for tsy's to regain their all time highs than there is for MBS. Why? And how do those reasons further suggest the firmness of the upper limits in MBS? (in other words, how does they suggest MBS won't go higher than 102-07 and why they might even be more likely to give up ground than to gain?)
- Hints:
- be sure to consider the most critical component in the VALUATION of MBS
- be sure to consider upcoming events in the MBS calendar that could have an immediate material impact on prices
- be sure to look for a considerable line of technical resistance in tsy yields (not shown on chart)
- be sure to consider events in the medium to longer term MBS calendar
OK, that's a long enough post for AM commentary, so vent your frustration and silence me with your stellar comments!
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