The day began with bond markets already on the back foot after stronger Chinese exports, a stronger Spanish debt auction, and an unchanged ECB policy statement. All that was enough to get 10yr TSYs in the door roughly 4 bps higher than Wednesday's latest levels. A flowery press conference from ECB Pres Draghi did little to help bond markets come stomping back toward lower yields, but even holding sideways to slightly higher was a vacation compared to the carnage in German Bunds. If US 10's and German 10's maintained their previous correlation through today's ECB, then US 10's would be at 1.97% this afternoon. The afternoon's 30yr Bond auction DID, in fact, offer a helping hand, but after the initial pop to the mid 1.87's, bond markets were right back to their leaky ways, with both 10's and MBS heading out almost perfectly in line with morning levels. On a qualitative note, it's unpleasant to see 10's fail to break back down through 1.865, but they did show a good amount of resolve vs spillover selling suggested by European markets. Feeling pretty neutral heading into tomorrow--still very guarded, but not without some cause for optimism.
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 4:06 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
Brief Pull-Back On Bullard Comments. FOMC Shell-Shock Persists
FOMC voters talk about adjusting the QE outlook and bond markets quickly revisit painful memories from last week's FOMC Minutes. St. Lousis Fed's Bullard will be an FOMC Voter this year and he leans a bit hawkish (meaning he's less in favor of quantitative easing and any other Fed policy that could stoke inflationary fires at its core, the whole "hawks/doves" nomenclature centers on inflation. Ipso facto, a "hawk" is essentially an "inflation hawk") though is significantly more balanced in his pros/cons assessment of Fed policy than, say, the outbound 2012 voter Jeffrey Lacker.
Because Bullard is a more central sort of hawk, markets are more interested in his speeches (or they should be anyway), as he is closer to the average FOMC Voter in terms policy stance. And so it was that bond prices briefly pulled back after a Bullard speech earlier. Some of his comments stirred up painful memories of last week's FOMC Minutes just now, though markets have already mostly recovered.
To reiterate our stance on the question of what last week meant (because it seems like it needs to be reiterated), we don't think the FOMC Minutes suggested an accelerated time frame for QE. They did, however, DECREASE the level of certainty and comfort regarding the seamless continuation of bond buying. The Fed has been crystal clear in saying that bond buying will continue for a short while AFTER it's no longer needed. In other words, they want to make sure the car is running under it's own power before pulling off the jumper cables. Seems sensible, and even the inflation hawks agree (mostly), but with the big distinction being that inflationary risks are a bigger concern for them.
The bottom line is that the hawks don't much care for QE, even if they acquiesce (mostly) to it being a necessary evil. For such reasons, folks like Bullard are clear in pointing out that QE could "taper" depending on inbound macroeconomic data.
This turned out to have the biggest impact on markets of any instance of Fed-speak since last week's Minutes. It wasn't much, and the course was possibly reversing anyway, but rates did come under some pressure after Bullard. 10's simply moved back to the mid point of the pre-auction range trade and MBS shed a few ticks but have since bounced back a bit. Sideways grinding into the close, but no legs on a post-auction rally.
Moderately Strong 30yr Auction Lifts Bonds To Best Levels
The 30yr Auction was stronger-than-expected in terms of the awarded yield (3.070 vs a 3.088 1pm "when-issued" yield). When-issued or "WI" can be thought of as the "expected" stopping yield for the auction. Additionally, the ratio of dollars bid vs the amount of dollars auctioned was 2.77, moderately higher than the recent average of 2.60. (More on auction jargon HERE
All things considered, it was a reasonably strong auction, and it had to be in order to prevent further weakness in bond markets. Even with the good result, 10 Yr Treasuries are still struggling to make it back into yesterday's range and MBS have stalled out right at their highs of the day.
Fannie 3.0s are up roughly 4 ticks from their pre-auction levels (104-14 vs 104-10), which is definitely better than sharp stick in the eye, but not necessarily good enough for more than few lenders to be considering a positive reprice. In terms of 10yr yields, the week is shaping up to be a sideways grind between 1.91 and 1.85 with auction helping us get back to the center of that range, but not to break through it. 10's are currently up a few bps on the day at 1.88, but off their pre-auction highs just over 1.90.
Live Chat Featured Comments
Victor Burek : "i always thought you could rent out a second home as long as you used it for a couple weeks each year, and uw'ing was just being ulta conservative on underwriting"
Ben Biscoe : "our guides say borrower must occupy at least two weeks out of the year to be considered a second home"
Andrew Peterson : "I always thought if it was rented for more than 2 weeks per yer the UW considered it investment."
Ira Selwin : "•The property may not be leased or rented, or intended for lease or rental, other than on an occasional basis."
Ben Biscoe : "sometimes you can get around that if the borrower occupies at least two weeks per year, thats indicated on schedule E as fair rental days vs. personal use days. its a pain to do that so probably easier to do it straight investment"
Justin Heiden : "even if there is rental income on the Schedule E you can still count it as a second home. It only has to be made available for there use for 1 week out of the year. This is very typical for resort areas...I do it all of the time"
Ryan Kelly : "if rental income is recieved it's investment"
Clayton Sandy : "If he reports income, I'd say it's a rental."
Derek Nadvornick : "4506 Transcripts"
Patrick McCarroll : "Depends on UW and which definition they use regarding second homes. The IRS or FNMA "
Caroline Roy : "on the VA IRRL question. He uses it as a second home as well, but reports Sched. E income. Can i do that as a second home? no doc loan, so how would we make the distinction between investment and second home?"
Bryce Schetselaar : "The home market here in southern california is crazy. Borrower has been offering $10-20k over asking and has not received any accepted offers."
Steve Chizmadia : "Appraisal waivers are few and far between after the last update to DU."
Curt Sandfort : "gotta love DU, r/t refi, 800 fico, 2x the mortgage amount in liquid cash...yep, that's a full appraisal please."
Victor Burek : "santelli says.....A-"
Matthew Graham : "In the context of overnight weakness, "B," but the rickster isn't much for context, so he'll probably go A to A-"
Matthew Graham : "A"
Matthew Graham : "RTRS- U.S. 29-year 10-month bond BID-TO-COVER RATIO 2.77, NON-COMP BIDS $10.29 MLN "
Matthew Graham : "RTRS- U.S. SELLS $13 BLN 29-YEAR 10-MONTH BONDS AT HIGH YIELD 3.070 PCT, AWARDS 5.45 PCT OF BIDS AT HIGH "
Matthew Graham : "results in a few seconds"
Matthew Graham : "anyway, recent average bid-to-cover has been 2.6. 1pm WI yield 3.086 (this is the baseline from which we assess the auction's stopping yield. Higher is worse, lower is better). Higher BTC would be better, lower would be worse, but not quite as important as the stopping yield"