Our old friend "The Basis."

You may hear the basis referred to more and more often of late. For those in need of a refresher, the basis is simply the PRICE vs. PRICE difference between MBS and Treasuries.

It represents a bit of a challenge in terms of being a germane metric, because at any given time, it is highly unlikely that our particular "current coupon" (i.e. the MBS coupon where the highest bvolume of trades are taking place) will have a "speed" or "duration" of exactly 2, 5, 10, or 30 years. So we have to choose which treasury coupon lines up with which MBS coupon the most appropriately. It's always best to start with current coupons as 5.5's are where a majority of our lenders are originating right now, and it also happens to be one of the two most liquid coupons for traders as well (it pushed briefly down into 5.0 territory, but as you can see, today will buck that trend).

Speeds on 5.5's right now are slightly over 7.5 years, making the 10 year treasury a more valid basis.

The following is a 2 day graph of the basis. The positivity herein is that mortgages have managed to keep "dancing on the back of the bruised" treasuries. Almost like "follow the bouncing ball." This is only positive inasmuch as it indicates a slight preference among market participants for MBS. Now all that would remain is for the government to convince capital markets that printing unprecedented amounts of money is not going to have an inflationary impact! Oh yeah, and there's that whole "avoiding headline risk" thing too.

here's your graph....

Teal is MBS and Yellow is a Ten Year UST. The long flat line on MBS is the overnight session for which we have no graphable data.

All this to say: "it could be worse! you could be a treasury..."