"Up in Coupon" takes a rest this morning as profit takers re-load for another round of day trading. Treasuries are selling off and MBS are outperforming the yield curve. (Spreads are tighter across the stack.)
If you
are searching for reasons about why we are selling....read this POST <-- CLICK ME
1045 marks...
Since 3pm Close yesterday
FN30__________________________________
FN 4.5 -------->>>> -0-10 to 100-26 from 101-04
FN 5.0 -------->>>> -0-07 to 101-30 from 102-05
FN 5.5 -------->>>> -0-05 to 102-15 from 102-20
FN 6.0 -------->>>> -0-03 to 103-07 from 103-10
GN30__________________________________
GN 4.5 -------->>>> -0-11 to 101-08 from 101-19
GN 5.0 -------->>>> -0-07 to 102-15 from 102-22
GN 5.5 -------->>>> -0-05 to 102-29 from 103-02
GN 6.0 -------->>>> -0-04 to 103-14 from 103-18
Yesterday we got more help from the Fed in the short end of the stack while the rest of the market took advantage of the "less than expected prepay environment" (borrowers not closing) by taking "up in coupon" profits. This morning more of the same is occurring...the government is supporting lower coupons while MBS day traders mindlessly chase more return in the upper end of the coupon stack (5.5s-6.0s).
Equities are looking for a reason to rally...more specifically they are patiently awaiting news from Capitol Hill regarding the final version of Stimulus legislation. For the super liquid Treasury market this implies a steeper yield curve may be ahead as equity traders unwind their flight to safety positions. But of course this will depend on headline news. Higher TSY yields will further MBS market participant's willingness to chase higher MBS yields while borrowers await "it that shall not be named". (Returns compared to the MBS benchmark---Treasury Notes). This implies "up in coupon" day trading strategies will continue to be employed for the time being...at least until the short end of the stack sells off enough to justify shedding added prepayment risk (selling 6.0s) for cheaper and safer MBS (4.0-4.5s). On top of that mortgage bankers will have to deliver the production or market participants will move back "up in coupon" again. Darn chicken and the egg dilemma! See what I mean by stars aligning?
Stocks and Bonds so far...
Rate Sheets are noticeably worse this morning. SIFMA recommends a 2pm close for bond markets ahead of the 3 day weekend.
On a side note...thank you for the influx of appreciative emails I have been receiving lately. In return I offer our gratitude for your participation in the MBS discussion. Your perspective has allowed for a greater awareness among all mortgage market participants.
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