MBS OPEN: Choppy Start to Session After First Round of Data

by Adam Quinones

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GREEN was splattered all over MBS price screens yesterday as every offer got lifted more times than Joan Rivers face.  Lenders repriced for the better following continued valuation appreciations. I now spy with my little eye, rate sheet rebate paying at 4.50.

The FN 4.0 ended the day at +0-10 at 99-27 yielding 4.023% and the FN 4.5 went out the door +0-08 at 102-08 yielding 4.225%. The secondary market current coupon was 4.033%. Yield spreads were REALLY tight at +70/10yr TSY and +60/10yr swap.

Don't make any broad assumptions about the rates market because mortgages have traded so well over the past three weeks. While TSYs continue to do juuuust fine,  consistent outperformance in the agency MBS market is a function of supply/demand dynamics..or a lack of MBS supply to put it more simply.

The important thing to note is that MBS yield spreads are REALLY TIGHT....which means "rate sheet influential" MBS coupons are priced VERY RICH compared to their benchmarks. MG outlined and illustrated the yesterday's trading session in the MBS CLOSE.

HERE is a refresher on yield spreads

Last time valuations were this rich guess what happened...BLACK WEDNESDAY. Don't panic...that situation occurred under much different circumstances and is not likely to happen again heading into year end. Do you recall? If not here is quick reminder...the green shoots theory was sprouting and inflation worries were growing. Momentum was picking up in stocks as economic data was signaling stabilization...all appeared to be recovering. Well...that is not the case nowadays. Once budding green shoots now have a layer of frost over them as economic uncertainties are abundant. Don't panic...not that it would make a huge difference though right?...you  have a large majority of your pipeline locked...right?

We get a boatload of data this morning..some of which has already hit screens.

Consumer Spending rose 0.7% in October. Personal Income was 0.2% higher. Wages and salaries were unchanged. Disposable income was +0.4%. Personal Consumption Expenditures increased  0.2%, and the Savings rate fell 0.2 to 4.4%

Durable goods orders fell 0.6%.Excluding Transportation, Durable Goods Orders were -1.3% in October. Both metrics were WORSE THAN EXPECTED.

Jobless Claims fell 35,000 to 466,000. Economists were expecting 500,000 new claims...so MUCH better than expected. Continuing Claims fell 190,000 to 5.423 million. Again...better than expected.

The rates market had a choppy reaction to the data...but the range is containing. 10s are back to the bottom side of the rates range, testing 3.31% and failing again.

After a negative reaction to the 830 data overload..."rate sheet influential" MBS prices have bounced back into the green.

The FN 4.0 is +0-04 at 99-31 and the FN 4.5 is +0-04 at 102-12. I dont have to do much with my spreadsheet to figure out the current coupon. The FN 4.0 is just about at 100-00 which means...yeh you guessed it...the secondary market current coupon is just about 4.00%. If the FN 4.0 breaks into the 100 handle then the current coupon with fall below 4.00%. Wow...its like old times again isn't it?

Secondary Market Current Coupon: the actual or interpolated coupon that would arrive at a par ($100) dollar price in the secondary or trading market. This is sometimes one coupon (i.e. FNMA 4.5%s) or a blend of 2 coupons (4%s and 4.5%s) that will bring about a theoretical price of par in secondary trading (what lenders use to derive at primary mortgage rates-after servicing fees, g-fees,etc.).

Below is an illustration of Victor Burek's heart rate after watching Donny Osmond on Dancing with the Stars...haha. No I am kidding it's the Fannie 4.5's "offers getting lifted" trend channel. Bids desperately seeking an offer...

Are you working today?