Posted
Heading into the 5pm "what a slow day in the mortgage market" marking period...
The FN 4.0 is -0-03 at 98-01 yielding 4.189% and the FN 4.5 is flat on the day at 101 the rock yielding 4.39%. The secondary market current coupon is 4.33%. The CC yield is 61bps over the 10yr TSY note yield and 58.6 basis points over the 10 yr swap rate. Static current coupon yield spread valuations are TIGHTER AGAIN! Holy relentless yield spread tightening!
LOOK HOW SIDEWAYS FN 4.5 PRICES WERE TODAY!
The MBS NINJA shares his thoughts on the recent stability of "rate sheet influential" MBS coupons in the face of rising benchmark yields:
Mortgages, trading in the secondary market (soon to filter back to the primary and rate sensitive one), are tightening daily as more money is put to work along lower/current coupons than on premium ones. The story is unchanged since FHLMC and then FNMA announced sweeping buyouts of 120+ day delinquent loans that overly populate the 5.5%s thru 7%s secondary coupons. The rest of the “stack” is less infected with laboring borrowers and hence less trouble free than its “up in coupon” cousins. This all means that any investments into MBS these daze are more likely reserved for interest-rate sensitive coupons like 4.5%s and hence more likely to keep spreads and ultimately mortgage rates in line and not bulging higher in any variance. The wildcard is always that master of all interest rates, treasuries, as that market is more ruled by the fate of the economy and more directly affected than are MBS.
This is all good news as things hold a modest to tolerable trading range (take it AQ-MG), as 10yr notes hold a modest 10 -20 bps corridor from 3.65% to 3.80%. This will serve to keep lending rates lower or at least tolerable while the financial world figures out its next move.
Ok back to me.
Plain and Simple: demand for rate sheet influential MBS coupons remains firm relative to the amount of supply for sale. The Fed still has $34 billion to spend and the FN/FRE delinquency buyouts are keeping traders nervous about fast money (day trading) investing in high prepayment risk, credit impaired MBS coupons like FN 6.0s and 6.5s. The resulting effect is a "down in coupon" bias which leads us to believe current coupon MBS yield spreads will remain rich (tight) for the time being as there are still at least 2 buyers for every 1 seller. This leaves mortgage rates at the mercy of benchmark big brother Treasuries...
The chart below is the 10 year Treasury futures contract. Notice how volume increased into the sell off this morning. This implies more traders were selling as the market moved lower (in price). This is important because when TSYs tried to rally after the auction (dealers pushing up prices to distribute inventory of 10s?), positive progress ran into a firm layer of "position resistance" at these price levels. (117-00 to 116-25). In the near term future, these levels will be tough resistance to break.
The chart below looks highlights volume at specific prices today. As you can see the majority of selling took place between the 116.85 to 116.70 range (in bps). This equates to the 116-28 to 116-23 range on the chart above.
I haven't done any basis trading lately so I am not sure exactly what these prices equate to in the cash market but from the chart below you can see how evident 3.72% really is in the short term. This is MGs preferred pivot point. I am keeping my eyes on the mid-range 3.71 mark and the 38% retracement of the Dec.21 sell off...3.734%.
The takeaway...
For the time being, at least until we get closer to the Fed's exit from the agency MBS market, mortgage rates will take their directional guidance from the movement of benchmark Treasuries.