It's no secret by now that Wednesday through Friday of this week bring an exceptionally heavy load of economic data and events, collectively carrying the potential to move markets as much as they've moved in recent memory. It's also commonly known that Wednesday is the day after tomorrow. As such, markets are taking their sweet time ramping up activity levels with today's session being almost entirely a 'dud.' There was mild movement in MBS, but the range was exceptionally small and no lender reprices were reported. Pending Home Sales did little to motivate any noticeable movement, but perhaps helped trading levels stay range-bound as it suggested rising rates are indeed taking a toll on the housing market (not "new news" in that sense, but another piece of evidence to add to a recently growing body). After that data, the day was essentially done. MBS dipped slightly into the 1pm hour as Treasuries came under some pressure from corporate rate-lock selling, but held ground at the lows and returned to near-unchanged levels into the final hour.
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 4:04 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 on Earlier Bout of Weakness: Corporate Credit Markets
We've discussed "corporate rate-lock selling" in the past as a source of Treasury-specific pressure. This occurs when a firm is issuing a corporate bond (taking in investment that they'll then make payments on at a rate that usually involves a benchmark like 10yr Treasuries + a margin. In a fixed rate offering, the firm may "lock in" its cost of funding by selling Treasuries.
This means they've given up the right to earn today's interest rates in exchange for cash. If prices fall and rates move higher between the time their bond offering is priced and the time it's fully subscribed , they'll have already sold at the price highs, offsetting any fall in prices and effectively "locking in" the rate at which they'll be repaying the investors in their newly issued offering.
Here's more from Reuters on today's potential rate-lock selling. (This weakness has mostly worked it's way through the market and MBS are back near unchanged levels):
(Reuters) - Prices of U.S. Treasuries
slipped on Monday as corporate issuers launched deals to try to
lock in rates ahead of this week's Federal Reserve policy
statement and key U.S. employment report, traders said.
Dan Heckman, senior fixed income strategist at U.S. Bank
Wealth Management in Kansas, Missouri, said the market would
likely trade "in a pretty tight range" unless Friday's
employment report "is incredibly weak" and persuades market
participants that the Fed won't begin to cut back on its bond
purchases until December."
Currently, many participants believe the U.S. central bank
will begin to trim the bond purchases that partly comprise its
quantitative easing policy in September.
Energy names dominated the U.S. high-grade primary market on
Monday in a week estimated to see $15 billion to $20 billion in
corporate issuance. Most of the deals are expected to get done
before the Fed's policy announcement on Wednesday and the jobs
number on Friday, said IFR, a Thomson Reuters company.
Selling Pressure and Negative Reprice Risk Increasing
Treasuries are leading a charge into weaker territory for MBS. While 10yr yields are well into their highs of the day now at 2.602, Fannie 3.5 and 4.0 MBS are just now falling in line with their low prices on the day. There is not enough of a gap in prices between rate sheet print times and current levels to justify reprice risk for most lenders, but some might be getting close if we hold here or move any lower.
Fannie 4.0s are 3 ticks off their highs at 103-25+ and Fannie 3.5s are 5 ticks off their highs at 100-23.
Live Chat Featured Comments
Matt Hodges : "i don't think the Fed knows the number"
Scott Rieke : "I can understand the WH getting it the night before... but a few days. I don't know."
William Packer : "I would imagine the fed already knows the number"
Scott Rieke : "no doubt - quiet before the storm. I still find it odd the Fed is releasing a decision BEFORE NFP. That's how the calendar plays out, I know. But imagine the number doesn't remotely support their arguments, one way or another. Unless they are already privvy... which they may be. I don't know the timing on that"
William Packer : "wednesday - friday should be a lot more interesting"
William Packer : "kind of a boring day today in the mbs markets"
Caroline Roy : "genworth seems fine. it is UGI that is tricky"
Roger Moore : "is Genworth typically one of the MI companies not supported by most lenders under HARP?"
Bert Swyers : "one thing we know for sure is rates will move quickly"
Bryce Schetselaar : "It could be a really good or really bad "
Bryce Schetselaar : "I was just looking at it and thinking the same thing Bert"
Bert Swyers : "that econ calendar is pretty crazy this week, make or break week for rates I think"
Matthew Graham : "np. Pretty well-balanced too. Probably more being originated into 4.0s but anything 4.125 and under has to go into 3.5s and 4.25% can as well, but can also go into 4.0s."
Matthew Graham : "Both matter at the moment."
Nate Miller : "does secondary currently put more weight on the fannie 3.5 for potential reprices? are 4.0's factored in also?"
Alan Craft : "Plug in the state and county here https://entp.hud.gov/idapp/html/hicost1.cfm"
Daniel Kramer : "ok, thanks. I have a potential borrower in Ulster County, NY and he wants 95% to 445k loan. I tol dhim max is 417k to 87% based on purchase price."
Matt Hodges : "county loan limits restrict FHA loan sizes"
Daniel Kramer : "FHA question, if the max loan limit for a county is less than 417k, does that mean a borrower cant get a FHA 30 yr fixed loan for 417k? "
Hugh W. Page : "You're right. QE continues. Any significant reduction in QE beyond reduction in debt has a high likelihood of crashing the market IMO."
Victor Burek : "like if supply drops 10%, they reduce 10%"
John Tassios : "you never know how the bond market will react once tapering starts, we saw a glimpse of it already in May and June"
Victor Burek : "I still think fed wont taper in Sept, but if they do, it will be somehow tied to the lower new debt issuance"
Victor Burek : "quite possibly, it would be like they are buying the same share"
Andy Pada : "so what would it mean if the the supply is roughly $20B less per month. Does this take the sting out of any taper?"
Victor Burek : "I think the auction sizes were the same last quarter and this quarter"
Andy Pada : "seems like the Treasury did not issue a lot of debt (relatively) in the second quarter. Am I reading that correctly?"