At this point in the day, it looks like MBS will be able to make it to the exits with sustaining any major damage on top of that which was already sustained at the open (though prices will fall due to the "roll"), but the broader bond market didn't make that entirely guaranteed or easy today. Some of the volatility has already been discussed in the context of overnight markets, economic data abroad, Syria headlines, and preparation for today's 3yr Treasury Auction. These things all matter, and they're all the sorts of market movers that are on "the list" of potential market movers.
Today "the list" expands to include Verizon. It's rare that we talk about an individual company in bond markets, but it's even more rare than an individual company issues corporate debt on the scale that Verizon is in the process of issuing. In fact, it's never been done before. The previous record held by Apple was $17 bln and Verizon's deal looks to be over $45 bln at last check.
This means that Verizon is offering A LOT of bonds in the same maturity ranges as Treasuries and paying much higher rates of return (the 30yr tranche is 2.65% HIGHER than 30yr benchmarks, or roughly 6.5% in today's terms). That's not to suggest that corporate debt is always fungible with Treasuries, but it's a compelling enough alternative that it matters.
Not only is there the "competition" component from the Verizon deal, but there's also volatility caused by the dynamic that corporate issuance has with Treasuries. In this, and many cases, corporate debt yields are based on Treasury yields plus a margin. There's no way to measure exactly how how Verizon prepares for such a colossal offering, but one of the ways they can hedge future rate volatility is to "lock" their rate by selling Treasuries today.
This so-called "rate-lock selling" only applies to the time period between the pricing of the corporate bond and the actual issuance. Depending on Verizon's strategy for hedging risk between now and then, they could sell a number of Treasuries at today's prices. If rates rise and prices fall, they'd have protected themselves against the interest rate risk in the meantime.
Because the rate-lock selling will eventually be unwound after the bonds are issued, this aspect of the issuance ultimately has a net neutral effect on bond markets, though it's presence causes volatility in the short term. The fact that $40bln+ of attractive yields is coming into the market is not net-neutral! Money managers and other accounts have to make room to subscribe for this deal by selling other "stuff."
Some of that "stuff" might be Treasuries, and on a week with 3, 10, and 30yr Treasury auctions already adding supply, the timing is challenging, and explains a lot of the negativity in bond markets today. The overall weakness in bond markets simply provides a drag on MBS, and thus Verizon affects the mortgage market.
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 4:08 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
Back to Lows and Increased Negative Reprice Risk
Treasuries and MBS are having a slippery afternoon with 10's in particular just breaking above their high yields for the day (close to 2.97 now). MBS fluctuations have thus far been contained enough to avoid any reprices. That may continue to be the case, but we're once again at the lows of the day with Fannie 4.0s at 102-15.
We'd also keep in mind that today is Class A 48-hour day, meaning that MBS trading is done for September coupons (the "roll"). This afternoon choppiness isn't necessarily indicative of MBS Market health.
Bottom line: negative reprice risk is still probably contained for almost all lenders, but a few might be thinking about it.
Treasuries and MBS Back Into Weaker Territory; Caution
The "caution" in the title is in effect if we don't hold our ground at current levels (2.95 in 10s and 102-16 in Fannie 4.0s). The positive reprice potential from the last update is gone and negative reprices could become possible, but are at bay for now.
Treasuries began selling shortly after the auction though not necessarily because of it. Additionally, the selling isn't so much of an outright bearishness on all Treasuries, but more focused on the longer maturities.
This can be thought of as an ebb and flow between maturities. 2's through 5's were being shunned relative to 10's and 30's earlier today. That was the safest move ahead of the 3yr auction. And now 3's are making up that lost ground after the reasonably strong auction.
They're not doing this by making gains themselves, but rather, by simply holding their ground while 10's and 30's sell-off. MBS are more attuned to the longer-dated Treasuries and thus are similarly off their best levels of the day.
This could ultimately look like a "working out of the kinks" in the yield curve with Treasuries not stampeding toward higher yields, but it's a bit too soon to call it. So far so good as far as holding the ground mentioned at the top of this update.
At Best Levels Now; Positive Reprice Potential Increasing
Any negative reprice risk that had been growing into the 11am hour is off the table now. MBS and Treasuries have both turned around and moved to their strongest levels of the day.
A good batch of short covering swept through Treasuries starting roughly 40 minutes ago. That created some positive momentum that may just now be subsiding. The epically large Verizon bond offering is certainly having an effect on the Treasury complex with longer maturities currently less afraid of the competition than shorter maturities (Verizon is offering corporate bonds based on Treasury rates plus margins of roughly 165-265bps for 3 to 30yr maturities). Combine that with impending auction supply in the short end and 2's and 3's have been the least bullish coupons today (you can click on 3yr Treasuries and 10yr to see the different shapes on the charts today).
MBS haven't actually kept pace with 10's as well as they have with 5's. But they have responded to the positivity from 11am to 12:30pm with a move from their lows of the day to the highs. Lenders may be somewhat hesitant to reprice ahead of the auction, not to mention the volatility, but positive reprices are now more possible than negative reprices.
Live Chat Featured Comments
Justin Harward : "the plan is to close this friday. I have new furinture appliances, tv/internet, ect being delivered on monday. But on the other hand we really don't want to deal with the kitchen island rebuild after closing."
Timothy Baron : "Yeah they blew it, and should have to honor the 11/2 date."
Justin Harward : "it was originally going to expire on 9/1 - they didn't want to extend until I called the ceo and threatened to file complaints, so they agreed to extend 15 days to 9/16 for a cost of 1 point ($2800 in this case). But the GFRE reflects an interest good thru date of 11/2 now. This is a local credit union that portfolios"
Caroline Roy : "a COC would be if you went passed the 9/16 and they changed the fees because the lock was expired. "
Justin Harward : "that's what I thought, so effectively our 15 day lock extension at 3.75% just became a 60 day lock extension"
Timothy Baron : "Man you've had a hard time with that builder & lender. Yikes."
Ira Selwin : "Justin - that is correct. A "mistake" isn't a COC"
Justin Harward : "we're planning to close this friday but the builder needs to completely rebuild our kitchen island, it's about 2 feet in the wrong area. THey would prefer to get it done pre closing rather then post closing, so I was thinking maybe we would have some extra time"
Justin Harward : "respa question for you guys. So my lender (personal purchase) begrudgenly extended our lock 15 days to 9/16 but when they sent out a new GFE it reflects a 60 day lock good through 11/2. I asked the LO about it and he said "oh, whoops, yeah that should be 9/16, I've corrected it in the system" Correct me if I'm wrong but without a valid change in circumstance they can't take that 11/2 date back right?"
Matthew Graham : "yes, the whole curve came to life CS. The fact that the short end joined the fun this time is simply a confirmation of your observation."
Christopher Stevens : "MG- it seems as soon as Fed mentioned a possible increase in short term rates a few months ago the short end of the curve came to life"
Matthew Graham : "in other words, 2's and 3's have been pinned to the floor ever since the Fed pinned them there with the calendar date verbiage in mid 2011. "
Matthew Graham : "I don't think that's the case. The notion of the Fed losing control of markets is interesting to talk about, but I think we're just seeing the short end "life-off" the runway as the end of ZIRP starts to look closer on the horizon than 3yr maturities, and maybe 2's too!"
Scott Rieke : "that is a very legitimate risk. if the front-end gets uncoupled, we're back to 2008 and a nasty credit freeze. Forget the belly or long-end. Inversion takes place first."
John Tassios : "I know, that is what worries me that the market is not buying the FED's rhetoric anymore and FED may be losing control of even the short end TSY"
Matthew Graham : "yeah, "good" is relative. The short end has been getting crushed"
Victor Burek : "Santelli gave it a A-"
Matthew Graham : "B+ out of context, B- in the context of the awful morning the short end has had."
Victor Burek : "pretty good mg?"
Matthew Graham : "RTRS- US TREASURY - PRIMARY DEALERS TAKE $14.45 BLN OF 3-YEAR NOTES SALE, INDIRECT $10.22 BLN "
Matthew Graham : "RTRS- U.S. 3-YEAR NOTES BID-TO-COVER RATIO 3.29, NON-COMP BIDS $41.31 MLN "
Matthew Graham : "RTRS- U.S. SELLS $31 BLN 3-YEAR NOTES AT HIGH YIELD 0.913 PCT, AWARDS 73.36 PCT OF BIDS AT HIGH "
Matthew Graham : "(meaning that the average bid-to-cover for the 3yr auction about to be reported has been 3.22 and markets are expecting a yield of .917)"
Matthew Graham : "3.22 recent average BTC, and .917 1pm WI. "
Chip Harris : "Does me no good though. HomeSteps Financing is currently available in the states of Alabama, Florida, Georgia, Illinois, Kentucky, North Carolina, South Carolina, Tennessee, Texas and Virginia."
Chip Harris : "http://www.homesteps.com/homesteps/financing/index.html"
Chip Harris : "Looks like it's called Home Steps. Same basically as Home Path but Freddie REO rather than Freddie"