Posted
In breaking news, it has been determined that today's NFP report was
all an elaborate hoax that was never intended to have any effect on the
markets beyond today. Or at least that's how the headline could read
at the top of the list of "things that would not surprise us." What do
I mean?
Nothing more than this: After all the sturm and drang of AM
volatility, the market continues in the exact same direction suggested
by it's previous trends, which would have been for a reversal at 3.56
(yesterday) and a continuation of the rally into today depositing us
somewhere in the neighborhood of 3.5... For MBS, just an extension of
previous trends as well (yesterday we warned against perceiving the
rally in MBS as an indication of reversing downtrends from the
beginning of the week, but given the broader market's reaction to NFP,
that's in fact basically what happened...)
Put to the picture, you can see that although we endure an
infinitely expected period of extreme volatility in the wake of the NFP
print, it might as well not even have happened given the levels at
which the day looks to for its 3pm marks...
And in tsys:
So
has anything really changed? If it has, no one would really know about
it... And stocks agree with the dow and S&P both within 1/10th of
1 per cent of unchanged...
The concluding sentiment here raises
an opportunity to discuss locking and floating concepts from both Vic's
consumer blog and my morning commentary. someone asked in a blog
comment today why vic said float and I said lock... Oh... If only it
were that simple, one of us could just be wrong and the other right,
and we could move on...
Vic gave more of a float impression. I
was more lock-biased... But the zen-like balance afforded you by
GUTFLOP suggests a hidden harmony...
Vic said: "Because the Employment report was friendly to the fixed income sector,
I am switching my outlook from lock to float. However, because we are
seeing better rates this morning, there is nothing wrong with locking
today to take advantage of overnight and morning improvements. "
I said : if you have the good prices passed on in rate sheets, it's time to
cash in. Traders probably will regardless... So perhaps this is not
an outright "lock alert," but it's a fairly strong suggestion for all
those who have seen the eigtht to a three eighths improvement from
yesterday afternoon's sheets...
I
have to apologize that I wasn't nearly as clear as Vic. It's a very
important distinction to see the part about "from yesterday afternoon's
rate sheets.." And I think "cash in" could have used more clarity. I
always want you to approach locking and floating from a gutflop
perspective... So to me, "cash in" is not the opposite of floating,
but rather an adjustment of your hedge ratio to become more lock biased
as two factors are satisfied:
a) MBS move towards all time highs
b) lenders give you pricing that's an eighth to three eighths better than the best pricing you had yesterday.
And
here at 10 ticks up on the day, we're right in the middle of that
range. The moral of the story is the balanced approach that vic
alludes to in saying "nothing wrong with locking today to take
advantage of improvements." Indeed there is not, and for my part, I
wouldn't suggest locking unless you are indeed improved over
yesterday's best sheets by the aforementioned margins. But when I'm
talking to you on the pro blog, the default assumption is maximizing
long term profitability and income stability. So it goes right back to
the 2 bullets above... To whatever extent your rate sheets are better
than before, AND prices are getting closer and closer to highs that
they probably won't break for a long long time, it makes all kinds of
sense to ratchet up the 'ol hedge ratio.
In light of "NFP
never happening," which is a conclusion I came to only in the last few
hours... I'd be a little less inclined to increase the hedge ratio
than I was this morning. But that is a much smaller consideration than
the question of how much of the gains are you seeing... We'll add to
the gutflop someday to talk more about this, but you really HAVE to be
a student of the TIMES that your lenders rate sheets come out, when
they reprice, whether they reprice more in the morning or afternoon,
whether it happens more with particular reports than others, what
treasuries are doing when it happens, how much rebate was given at a
certain rate over the last few months on any given rate sheet, and so
on and so on... If you are that diligent of a student of lender
pricing habits, you'll be able to know without doubt something like:
"last time MBS were at 101-08 the YSP at 4.75 was ____, but today it's
_____. I got a reprice at ____pm yesterday after beginning the day at
____ on the 4.75. MBS are ____ ticks up since the am and ____ ticks up
since the reprice, so _____ bank should be at _____ all things being
equal, so I will _____ this loan and _____ that one....
No,
that's not a "one train leaves from..." problem. It's the reality of
applying individual lender habits to the broader MBS market...
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