Posted
First off. If you have
not read the GUT-FLOP you really missed out on a hearty edumacation experience.
Click on this link to READ IT
At the open yesterday we
were optimistic that the current "up in coupon" (higher rates) bias was due for
a reversal, this supposition was based on the expectation that opportunistic
relative value "bargain buyers" would re-enter the MBS marketplace. Welp...that didn't
happen! We did report that real money buyers and a Fed bid attempted to eat up
excess originator supply unloading of 4.0s and 4.5s (this is a profit protecting strategy...just
like you should be doing!!!) but it just wasn't enough.
The MBS market has
been a net seller recently, rates have worsened which has resulted in a
pessimistic period of fading prospects for prosperity. The Fed induced "down in
coupon" journey we have been on over the past 50 some odd days has indeed
stalled and a stagnant/slight "up in coupon" bias has settled in across the stack.
The problem: the most important variable in the MBS price function (prepays)
has become a guessing game. The Federal Reserve's endeavor to jump start the US
financial system via housing has driven par bids deep into the throws of stack (as
low as uppers 3's). Now the entire coupon stack is trading at a premium and
lenders are failing to instigate a broad based refi boom. Translation: this quantitative inaccuracy (models that establish the value of MBS) has led MBS investors down varying
relative value purchasing paths. Essentially capital markets went from 5.5 to
3.5 in about 7 minutes, in the process they failed to account for the fact that
the slim and trim mortgage industry was not prepared for an onslaught of
activity. We are hoping that you are beginning to take note of the significance/importance
of the unknown MBS price function variable, prepayments...it's mucho importante!
Today those previously described "bargin buyers" have
emerged. This supports our stance that the MBS market will remain in an
opportunistic/speculative/at the ready trading range. The Fed will support low mortgage
rates to the best of their ability and the MBS investor will remain poised for "down
in coupon" purchases. I know I know everyone still wants to know when rate
sheets will get better. The prepayment perplexity has presented a "what came
first" dilemma (chicken or the egg). The "from 10,000 ft" foundation of a solution
to this problem is MBS bidders need to stay "at the ready", once lenders begin
to pass through juiced bps (margin) the REFI BOOM we have been expecting will have the fuel to re-ignite and prepayment
behavior will be less erratic...then portfolio management strategies will become
more apparent.
PS. We are exploring
the price function of MSRs and its effect over investor price strategies.
(static vs. OAS). We think we are onto a less publicized culprit of gappy primary/secondary spreads.
Secondary Marketing Managers and Capital Markets Desks, if you are interested in subscribing to the same fixed income and mortgage market data we use:
.