Mortgages are on a serious run...

Front-month TBA levels set yet another new record high this morning and yield spreads continued to tighten vs. benchmarks (thx swaps!). While the street more than likely sees the current coupon in the +55/10s range, my weighting on the 4.0 has the current coupon closer to +68/10s. No matter how you slice it, mortgage valuations are rich, and everyone still wants to own agency MBS cash flows. READ WHY.

It looked like we might see some directional movement yesterday, but that was a false alarm vols quickly deflated. After a few rounds of profit taking in the mid-morning hours, buyers quickly re-flooded the market, looking to take advantage of the slightest bit of weakness.

In terms of origination flows, 4.50 coupons are still the most active 30yr paper. That tells us lenders are selling loans with 4.75 to 5.125% note rates. Loan officers, does that sound right to you? Where is the 4.0 coupon production going??? Right to the servicing portfolio I'd imagine....or maybe trading a 4.5/4.0 coupon swap?

The front month FNCL 4.5 has broken it's own record in nine (9) of the last 35 sessions. When will it end? Maybe not until the roll. Dealers are short and it's getting down to crunch time. At this point in the delivery process, files should be in the hands of pool fillers, so someone is getting squeezed here. Sorry dealers, 48-hr  is on Tuesday August 10th.

What that means is lenders won't be finding any trouble when they try to sell forward their pipelines. From a lock/float perspective, the more important issue  ishow busy your lender is...

Because MBS prices have held near record highs, lenders can afford to pad their pricing and still offer super aggressive mortgage rates. This implies secondary won't mind as much if a few borrowers jump ship for another lender who is underwriting and closing refinances at a faster rate.  There is a downside to this situation though. You could lose a rate quote from one day to the next as lenders adjust their pricing to fluctuations in apps. We've seen some erratic pricing strategies lately. For float boaters, my advice is to make sure you've identified a few investor options just in case one of your lenders goes cold on pricing.

Below is a recap of loan pricing today. Rebate is 11bps better on average with the largest  improvements seen in the lower side of the note rate stack. Only one lender worsened rebate today.

I've called attention to two different observations.

(1) Check out how expensive it is to buy your rate down from 4.375 to 4.25%. That is a clear line of demarcation for mortgage rates. Any mortgage rate below 4.25 must go into a 3.50 MBS coupon, and we all know how liquid that market isn't. I am sticking to my "3.50s are not and have never traded in any size or liquidity".  Where is the relative value? What do you hedge against??? Yields are not attractive vs. long bond and duration does not match vs. 10s. The phantom coupon continues to prevent mortgage rates from moving below 4.375%

(2) The BE vs. Mandatory column shows you how much margin is being withheld by the major lenders. Three of the top 5 clearly don't need much more production in their pipeline. Refi turn times and retail pricing should be brutal at these three behomoth banks.

Let's check on the markets...

The Treasury just auctioned $37 billion 5-year notes. This issue is $1bn less than the previous auction and $5bn less than the largest issue on record, which was $42bn in April.

The bid to cover ratio, a measure of auction demand, was 3.06 bids submitted for every 1 accepted by Treasury. This is the highest bid to cover ratio since at least September 2007 and might be the highest btc ever, I'll have to look.

Only 26.6% of the issue was awarded at the high yield of 1.796% (1pm WI was 1.808%)   This is the 2nd lowest "high yield" at a 5-year auction. The lowest "high yield" on record was set in 12/2008: 1.54%.

Dealers took down 41.4% of the competitive bid and only 20.5% of what they bid on, both demand metrics were below average. Yay! This is exactly the opposite of what happened yesterday at the 2-year auction. READ MORE

Directs were awarded 11.4% of the issue and 31.5% of what they bid on. This does not signal aggressive bidding from the bond funds. 

Indirect bidders were there to pick up the slack though. Real money indirect accounts took home 47.3% of the issue and 69.6% of what they bid on. While the hit rate was a bit low, the overall award was a vast improvement from the 34.6% award seen at last month's auction. 

Plain and Simple: even though yields are extremely low, demand for U.S. debt is still strong

After the auction...

S&Ps traded up a few handles but are still -3.75 on the day. A real yawner in equities today. The long end of the yield curve has gone negative. The 3.50% coupon bearing 10yr TSY note is currently -0-01 at 103-24, up 0.03bps to 3.052%. This is the yield high of the session. The long bond is the worst performer, -0-14 at 104-20, up 2.5bos to 4.104%. The 2s/10s curve is 1bp steeper at 240bps.

Blah blah blah benchmark yields higher....and "rate sheet influential" MBS coupons continue to trade in record breaking territory! The August FNCL 4.5 is +0-06 at 104-08. That is a new record high, breaking the previous high of 104-07, set just a few hours ago. In terms of the coupons secondary uses to build your loan pricing...

The September delivery FNCL 4.0 is +0-06 at 101-17. The FNCL 4.5 is +0-04 at 103-26. The secondary market current coupon is 2.4bps lower on the session at 3.735%. Yield spreads are off their tights of the day but still firmer vs. "going out" marks yesterday.

One of the major lenders might reprice for the better, but the others should be set. Then again, in this environment "anything goes", especially when the majors (Wells, BoA, Citi, Chase, GMAC) are  able to buy the market whenever they choose. Let us if you see any reprices. There should be a few pass-through lenders and wholesalers passing along improved rebate.