Posted
In other words, MBS are a trading a tick higher or lower than unchanged on the day. That's 100-16 on the 4.5. Tsy's meanwhile are languishing, with the 10yr down 11 ticks, pushing the yield up to 3.50. The 30yr bond is down 21 ticks, pushing the yield up to 4.370.
As far as MBS and the Tsy market are concerned, when one is unchanged on the day and the other is noticeably higher or lower, it allows us (usually) to draw conclusions about movements in spread. The one thing you'd want to be cautious about would be whether or not there were fundamental changes in the prepayment expectations of MBS, but in the absence of that, you can generally assume the following.
If you see MBS holding steady like it is today and treasury yields are rising, it's normally an indication of spread TIGHTENING. If you need the refresher, that simply means MBS yields and Tsy yields are CLOSER TOGETHER. As we noted yesterday, the strength in MBS spreads continues to impress (and mystify to some extent). With the MBS current coupon at 4.3465 (calculated with our proprietary secret magic), that puts spread to the 10yr tsy at 84bps. That's very tight folks.. Maybe even tighter than it should be... Even if one were to assume to Fed would not be exiting in March, these are the spread ranges that begin to resist further meaningful tightening.
The conclusion is simple... If we're as tight as we're going to get to treasuries (more or less), then further weakness in tsy's will likely drag MBS into the red. Conversely, expect any rally in tsy's later today to outperform MBS. So on the chance we rally and your co-workers who don't read us are noting the improvements in the 10yr note on CNBC's ticker, you can tell them not to expect MBS to "improve in direct proportion, not only because tsy's normally lead MBS a bit into rallies, but also because spreads were tight ahead of the rally and are thus even more likely to widen into a rally."
Don't send us the bill when they go catatonic...
By way of caveat, we have seen a paradoxical day or two in the recent past where MBS TIGHTENED into a rally... Not common... But we think it would be even less common at these spread levels... Either way, it's time to start watching the data with refunding announcements behind us and FOMC on deck...
Here's your chart:
Regarding the "scary bounce" comment above... You'd be justified in letting it scare you as it looks like a meaningful inflection/pivot point after having supported yields yesterday and acting as resistance this AM. But as we noted last time yields crept up into the 3.5's (before the recent auctions), don't read too much technical significance into the numbers on days like today, at least not until all the cards are on the table. It's just that extra-aggressive "lead-off" and not (yet?) indicative of a broader shift.
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