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MBS MORNING: Breathe Easy.Mortgages Find Support In The Range
by Matthew Graham
Posted
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Even though the range has held up so well in recent weeks, one can't help but let the "what if" thoughts creep in when we see the half point sell off 2 hours into a Friday.  But once again, when the cards are shown, the range takes the pot, and we have to wonder for another day if AQ, who said "We didnt panic then are not panicking now. The range is still the range. Play the Range Until the Range Plays You." and "The market is range trading short term positions, not trending on BIG PICTURE outlooks," is Cool-Hand-Luke reincarnated.

Well played Cool-Hand...  But AQ and I BOTH hope, as we said yesterday, that this is becoming more of an EXPECTATION and less of a SURPRISE to you.  And we're flat out telling you WHEN THE RANGE BREAKS OR EVEN LOOKS LIKE IT'S BEGINNING TO BREAK, you will either know it because it happens so brutally, or more likely because we will be talking about it in every post.

Wanna see a longer term chart with more edification of the range and some of it's internal stops? 

Non-speed readers will be pleased to hear that the state of prices and yields at the moment obviates a decent chunk of writing and analysis.  Two reasons...

  1. If we are indeed "playing the range until the range plays us," and considering 10yr yields are near their highest levels, and those yields remain above 3.45 intraday, the only feasible course of action would be to float below 3.48 and only consider locking upon breaking into 3.45.  This of course assumes no event-driven spread wideners in MBS.   
  2. With number 1 in mind, there's not much to say that can't be said with a couple parallel lines overlaid on a few charts...  Ever played pong? 

Well, I'm sure it's not within the capacity of our minds, fingers, and egos to leave you completely analysis-free, but the same concepts repackaged 25 times a week might get old...  The important question I have is this: What do you want to discuss concerning all this range-trade business?  How clear is it for you?  What makes you say "oh yeah!  Totally!" and what leaves you scratching your head.  Don't be shy...  Even if you don't have a User ID yet, or haven't commented on this site, JUMP ON AND DO IT!!!  This is an excellent "calm before the storm" in which to interact as a community.

MBS, Tsy, and LIBOR Quotes

The FN 4.0 is currently -0-05 at 98-01 yielding 4.203% while the FN 4.5 is trading 6/32 lower at 100-20 yielding 4.426%. The secondary market current coupon is 4.381%. The FN 4.5 yield is 95.7bps over the 10yr TSY yield, wider than this morning.


Data provided by Thomson Reuters
Secondary Marketing Managers and Capital Markets Desks, if you are interested in subscribing to the same fixed income and mortgage market data we use:CLICK HERE.

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JTB  |  Contact or Connect with this Member
on
When you say that the range will be noticeably broken, "brutally". To what extent do you mean? Is it possible that we see a move as drastic as we did earlier this year and the result on Mortgage Rates is an increase of 1.25% in a matter of 2 weeks? Also, how much improvement could we possibly see in rates if we went the other way, say 10% sell of in stock market and we get the effects of the stock lever?
David Haynes  |  Contact or Connect with this Member
on
Thanks MG. Here’s a rainy day Q for you. What is more influential? The S&P or the dollar on the value & direction of MBS?
cstar  |  Contact or Connect with this Member
on
Have I told you lately that I love you???? Thanks as always, you guys are providing the most relevant info!
Jeff Nelson  |  Contact or Connect with this Member
on
Matt, this is only site I have ever read that makes sense. I have learned more about rates in the last couple years than the previous 15 combined. It’s the first site that doesn’t tell me to float when things are good and lock when things are bad. I’ve always thought that was the equivalent of buy high and sell low advice. I do have one question, how many days notice will you give us when we are going to break out of the range on the down side? :)
Michael Baker  |  Contact or Connect with this Member
on
That massive drop led to some serious "Butt Pucker" in my office for a short time today. Matt & Adam you both do a fantastic job. I am getting the feeling we could see a major break out very soon. I am leaning to a breakthrough of 3.50% on the 10 Year Year within the next 7 -10 days and 100.00 on the 4.50 Coupon. It just seems we are edging in that direction.....opinions? (Feel free to critique if I am wrong).
Michael Brennan  |  Contact or Connect with this Member
on
Following you guys for awhile now and I will tell you I hate that you wrote the breaks gonna be brutal because your usually very accurate! Hey and Congrats on the article in the "The Niche Report"!!
Greg White  |  Contact or Connect with this Member
on
Nice work MG (and AQ). Will you please include a chart for MBS price and TSY Yld for the past 6-18 months? I make my money on the small/intraday movements, but I believe a longer term view will help all of us convey some encouragement to our clients (and each other). Thanks!
Ray J  |  Contact or Connect with this Member
on
check out this old countrywide commercial... http://www.cjr.org/the_audit/the_high_bubble_era_in_retrosp.php
David Haynes  |  Contact or Connect with this Member
on
That's Awesome Raymond. Thanks!!
Matthew Graham  |  Contact or Connect with this Member
on
Yeah, will do Greg. Personally, I normally make my own lock/float decisions looking at the long term charts... Thanks for the positive feedback all... Make sure you see the "brutally" sentence for what it is... the "more likely because we will be talking about it in every post" is included not in ADDITION to an expectation of brutality, but IN LIEU of it... kinda like, one day we hit 3.55 and we start talking about it, nothing definitive the next day... maybe the week ends around 3.5. next week leaks out to 3.6 something... and you'll see the "out of the range" conversation picking up. I don't think we'll see something on the same scale as black wednesday, no... Different environment. That was a response to what was seen as the rapid realization of a BOND-UNFRIENDLY surprise. With stocks out ahead of the recovery (and earnings, and data, and logic), bond-unfriendly surprises are far less likely. In the event of a surprise, it is more likely to be the realization that the recovery didn't earn all the stripes it currently wears. Probably bond friendly on that one... But the inflation-boogie man is crafty... maximize your flexibility and readiness to act and you'll be fine. The expected post-fed exit widening would put today's prices under PAR, so we're eternally vigilant in anticipation and will probably be at the top of our game as far as reading warning signs. To break or not to break next week depends almost entirely on auctions. There's a decent amount of data as well, but call the data 20% and the auctions 80%.
Matthew Graham  |  Contact or Connect with this Member
on
Haynes, i'm not qualified to influence anyone's opinions on forex, but maybe can still offer something of value. it's not so much that one has a more CAUSAL relationship than the other... In most cases, when we look to one market as having indicative value for another, it's a question of CORRELATION. but to give you the simple answer, I'd be fairly willing to bet a lot of money that a chart of the dollar index correlates A LOT more positively with a chart of bond prices than does the S&P this year. Remember, there isn't a DIRECT value implication between stocks and MBS, but there is with the dollar. If anyone doesn't follow that, just consider that you hold a fixed income investment like MBS. If a status quo in the value of the dollar would see you get back $100k dollars in cash flows this month, and the dollar halves in value next month, although you still get $100k, it only has $50k of buying power... Not as much of an issue if you're going to reinvest it in a dollar denominated asset IF you hold it long enough for the dollar to come back up. But whenever you're realizing cash flows from a dollar denominated FIXED INCOME investment, you're losing value if the dollar is weaker. The same example in stocks could have the mitigating factor of a 50% increase in stock prices... Thus, you break even if stocks have risen as fast as the dollar has fallen. Indeed if you throw a stock chart up over a dollar index chart, you see a very inverse relationship with a good level of correlation. If we backed the dollar back up to "less-weak" levels the stock rally would have a good bit of wind taken out of it's sales. Short answer: bonds are a more stable, less emotional, and I'd argue more accurate correlation to the present and future state of the economy. So I wouldn't look much to stocks. By default + the innate dependencies, dollar wins.
David Haynes  |  Contact or Connect with this Member
on
Thanks MG!! Thank you for taking the time. A follow up question (last one on this topic), What would happen if the dollar fell & there was no indication of an appreciable gain for say 12months or more. Meaning the dollar fell & stayed put for at least 12 months?
Matthew Graham  |  Contact or Connect with this Member
on
The easy way for me to get out of having to know the real answer to that would be to say "it depends on what else is happening in other sections of the market." But for that to be the case, it would probably have to coincide with a difficult environment for bonds, rampant rallies in stocks, oil, and gold, and what else? plenty of inflation talk? who knows... But not very good for mortgage rates probably.
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