For the second straight day, we've seen MBS underperforming Treasury benchmarks. In other words, Treasuries managed to hold steady while MBS lost ground. The discrepancies between MBS and the rest of the fixed-income world over the last few days are definitely more than mere coincidence, but of the potential explanations, it's too soon to say which of them is the most accurate, or if it's not simply a mix of several underlying causes. Some of these potential causes are discussed in the featured comments below. As for the specifics of the day, AM data was rather uneventful and we get the sense that bond markets changed courses after an overnight sell-off more for the general flight-to-quality leading up to (and out of) Obama's press conference. Treasuries actually benefited from that movement whereas MBS simply struggled to hold their ground at the weakest levels of the day.
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing
is available via MBS Live.
Pricing as of 4:05 PM EST
Afternoon Reprice Alerts and Updates
Below is a recap of instant Reprice Alerts
and updates issued via email and text alert to MBS Live subscribers
More Potential Negative Reprice Risk As MBS Weakness Continues
MBS continue to diverge from broader bond markets as 10yr yields are actually edging into positive territory at the moment while Fannie 3.0s are close to their lows of the day, down 6 ticks at 104-23.
Even though MBS traded at lower levels earlier this morning, the trend toward weakness in spite of relative stability in bond markets is starting to become a real concern. It could be enough of a concern to increase the chances of negative reprices among some lenders, though we'd note that rate sheets were already fairly conservative today relative to the change in MBS prices.
Because of that, we're once again in a situation where reprice risk is hard to gauge. On the surface, we're no weaker than we were this morning, but if we don't bounce higher, quickly, the ugliness of the trend may be enough to do the trick.
Reuters Highlights From FOMC Minutes
Highlights from Minutes of the most recent FOMC Meeting on October 23-24
- A number of participants in FED'S October meeting thought more asset buys would likely needed after operation twist ends--FOMC minutes
- Several FOMC participants questioned effectiveness of asset purchases or whether more purchases warranted if moderate growth sustained
- FOMC participants generally favored use of economic thresholds to replace calendar date in forward guidance-minutes
- Participants offered differing views on whether quantitative or qualitative thresholds would be most effective-minutes
- FED policymakers generally thought QE3 had produced a marked easing in financial conditions-minutes
- Many FED policymakers saw uncertainty over us fiscal cliff and Europe restraining U.S. growth in coming months-minutes
- Minutes say many FED business contacts said they were delaying hiring and spending because of Fiscal Cliff
- A few FOMC participants indicated low rates could increase demand for risky assets that could lead to imprudent risk taking
- Many members of policy committee saw fed forward guidance on interest rates as effective tactic-minutes
- FED explored consensus forecasts based on individual policymaker views, but most felt it would be difficult to agree-minutes
MBS Swing Lower After Failing To Break 105-00. Reprice Risk Already?
As we mentioned in the morning alert, the business of assessing reprice risk on days like today is a bit tricky as it will depend heavily on the time of day that a particular lender released their first rate sheet. Some lenders are already facing prices in Fannie 3.0s that are more than 4 ticks weaker than rate sheet time, which we normally view as increasing the risks of negative reprices.
Stocks and bonds are showing a strong connection at the moment as the whole concept of "risk on" vs "risk off" moves in unison. Perhaps markets are so intently focused on the Fiscal cliff issues that we're waiting for anything meaningful to be divulged at the president's press conference later today, or maybe it's a complete non-issue.
Either way, Fannie 3.0 MBS are down to 104-26 after getting within half a tick of 105-00 roughly an hour ago. We're still not back to the earlier lows of the day, but are more than halfway there. Again, lender specifics will trump the general analysis, but generally speaking, we'd guess that these losses don't yet connote any sort of extreme reprice risks, though a few lenders could be close. We'd also note that it's not a runaway sell-off in mega high volume either--one potential saving grace, but stay vigilant if floating. Current prices at 104-26 look like an important intraday pivot.
Live Chat Featured Comments
Adam Quinones : "prob both."
Matthew Graham : ""ongoing post-QE3 adjustment" + whatever else... "
Matthew Graham : "yeah, the demarco thing isn't the only way to look at it btw. "
Adam Quinones : "my view is TBAs were just too expensive. this is the reversal."
Matthew Graham : "Long story short - potential DeMarco replacement viewed as less MBS friendly, and post-election, we're seeing some bet-hedging in that direction."
Matthew Graham : "ostensibly in favor of someone with looser policies that could have a negative impact on MBS duration in general"
Matthew Graham : "because of the speculation due to the FT article that Obama is likely to replace demarco in a recess appointment in late december"
Matthew Graham : "buzz seems to be the Demarco hedge."
Dan Ramirez : "the 10 yr moves I should say?"
Dan Ramirez : "why do you think we haven't translated over to the MBS to past few days? "