Posted
Prices are up... Way up....
The 5.5 is currently up 31 ticks on the day at 101-18.
But let's discuss the headline diction with respect to "artificial."
It would be a whole lot more exciting to be up 31 ticks if UST's weren't up 60 ticks in the 10 year, and roughly 50 ticks in the five year. The only solace here is that the true basis for spread right now is somewhere between a 10 year and a 5 year, so spreads are not gapped out quite as wide as the basis would indicate at the moment.
Still, even though we can't really look to history as a lesson in these unprecedented times, the last time we packed on so many price gains in such a short amount of time, the "fall" was swift and catastrophic. Will that happen this time? Probably not considering the government's explicit intention to assuage the fears of MBS investors. The point is to take these gains with a grain of salt. The whole world knows that a sub 3.5 10 UST is not sustainable long term. So when it comes back up, what's the implication to MBS?
The best way to answer that question at this point is thus: All we can do is hope that headline risk stays at a minimum for all risk and spread products, but especially for the mortgage market. The longer we can go between now and the next Lehman, the next Indymac, the next "Freddie's cookin' the books" panic, etc... the more gradual return of MBS investors we might see. Asia is still largely absent, though a value bid may be generated by today's spread blow out.
Certainly, in the absence of headline risk, we'll tighten as treasuries return to normal, but unless we tighten quickly enough, rates could still have blips of weakness in the short to mid term. As the drama subsides over the course of the week (and as we wait with bated breath for AIG's fate), if we can hold these 101+ levels on 5.5's, it will keep us on the gradual uptrend where we want to be.
Look for some lenders to reprice for the better this afternoon, depending on whether or not the frenzied buying sustains itself. There are heavy 2 way flows right now in 5.5's and 5.0's. Where we stop, nobody knows!
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