Posted
The price action in the 10yr is like a coiling cobra at the moment. A range beset by yesterday's 3.56 snd this AM's 3.515 has gradually narrowed into what must consequently be wherever it is the market wants to be ahead of the NFP report... The cobra's extended body gradually occupies a smaller and smaller footprint as it prepares to strike out... Either direction is possible... It's also possible that he may not see a sufficient opportunity to strike and the movements that undo the coiled position will be less directional...
Regardless of that snake in the grass, the supportive-week for MBS has been decidely, well, supportive... As AQ mentioned earlier, we're seeing an uncommon occurrence in that MBS are extending whereas the yield curve is steepening. In plainer and simpler terms, that means that the preference in treasuries has been to shed the duration of the 10 and 30 yr securities in favor of the shorter end of the stack.
Conversely, It's the lower coupon and hence LONGER duration MBS that have gained more price today than the higher coupon and hence SHORTER DURATION portions of the stack. That's a trend that's not likely to continue indefinitely, but for today at least, it's a good thing for anyone waiting on potential reprices for the better. Some have already been seen and others may follow before day's end. The current coupon continues in similar territory at 4.34655, and with a few bps of back-up in the 10yr, that puts spreads (cc/10's) just under 82bps. A bit tighter on the already very tight levels.
At this point, floaters are floating into NFP risk, so GUTFLOP accordingly. Depending on your lender, the impact of the NFP print will likely be priced in before you can lock tomorrow (notwithstanding early pricing or overnight price protection). With MBS a mere point off it's all time highs, not to mention in the range of it's tightest spread levels, there's plenty of reason to have a decent portion of the pipeline hedged in the lock column. That's just a numbers game though and completely dependent on your individual pipeline attributes.
In other words, we can't take a stand on what the NFP reading will be, but historically and with a nod to the underlying fundamentals, a slight bias towards locking should prove to the the profitable choice in the long run, even if we get some more wind in our sails with a worse than expected NFP tomorrow. The more aggressive floaters might notice that tsy's are closer to the high yield marks of recent ranges, and appear to be a little concessionary ahead of the volatility.
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