Whether you call it a Flight-To-Quality (FTQ) or Flight-To-Safety, or "oh crap, the sky is falling, let's buy some risk-free debt!!," it appears that despite the much-maligned looming treasury supply, the good old-fashioned US treasury is still the risk-free benchmark of choice when it comes to global economic crisis. After a night and day of discouraging economic headlines and consensus viewpoints, investors were seeking the safe haven of treasuries. And seek they did (and seek and seek and seek) all night long. Once the US session started however, everything held relatively flat all day long. The benchmark 10 year treasury yield opened precipitously lower, concomitant with equities and MBS yields (improved prices). And on a day with limited scheduled data and an entire planet transfixed in anticipation of Obama's signature on the stimulus bill, everything just seemed to shut down in terms of both volume and directionality. Here are 10 yr tsy's and the Dow today (MBS curves look remarkably similar). This is a 2 day chart so you can see the change from Friday's session to today, and then note the relative "Flatness" that ensued.
As has been the case in most recent FTQ rallies, treasuries were the big winner and though improved, MBS lagged behind. The "lag" today was appreciable and resulted in a ridiculous amount of spread widening. Whereas the 10yr surged 60/32nds, the most comparable MBS coupon wasn't even up half a point (14 ticks to be specific). The yield curve took a shift back toward panic mode (aka: flattened), a phenomenon that also did a fair share of damage to credit indicators such as the TED spread and 2 year swap spread, which, after approaching about 50 basis points last month, is again in the middle ground between "disaster averted" and "full blown credit crisis" just over 70 basis points. You can see the marked volatility in the Dow (white line above) as the afternoon session was mid-digestion of stimulus execution, before ending on a down note at 7552, just a point off 2008's low.
To revisit MBS's relative underperformance today, volume was well below normal. And of the volume that did come in, sellers were well-represented considering that we are near levels that have seemed to encourage profit taking recently. (seems someone around here mentioned "watch out for profit taking" last week). The Fed, as is their wont of late, was in again in lower coupons, adding to the "down in coupon" play that perennially accompanies these treasury rallies, but not nearly enough to get MBS anywhere close to t-bills stellar performance. The fact that there is, once again, a huge week of supply in terms of treasury auctions, including the re-introduction of the elusive 7 yr bill, bodes well for a stable basis for MBS (at least for this hour -- sarcasm intended). Given the "back and forth" speculation recently, it wouldn't be a shock to see a big sell off in tsy's if the lemmings decide to change their mind and construe the stimulus as positive tomorrow morning.
Psychologically, current Dow levels are a meaningful "trip wire." If we dip or more importantly CLOSE below the annual lows tomorrow, it could spark further exploration into lower territory. One would assume (probably fairly safely) that this would keep positive pressure on treasuries, and thus MBS (despite the fact that spreads would continue to widen). Keep in mind, that when things get bad enough, even FTQ can be bad for MBS if--although it's a stretch to suppose this is anything close to the thought process--investors become concerned that the economy is SO bad that jobs and wages and confidence, etc... deteriorate to a point where we see a noticeable impact on mortgage performance.
Among the limited scheduled data today was the NAHB's home builder index. Here we find a bit more fuel to the "spread widening" fire (or at the very least, it certainly didn't HELP MBS performance). Sentiment improved only to 9.0 in Feb after hitting a record low of 8.0 in January. One positive to glean, however, was that the measure of traffic of prospective buyers rose from 8.0 to 11.0. This actually is somewhat of a signal that the low rate environment IS, in fact, impacting the purchase market. More confirmation is needed though from future reports. The worst component of the report was the component that measures sales expectations over the next 6 months. Contrary to any "hope" denoted by the traffic measurment, this metric actually fell to a record low of 15.0 from 17.0 last month. The NAHB's chief economist cited the main thorn in homebuilders' side is the concern on foreclosures, short sales, and other workouts as an indication of persistently decreasing home values. It's unclear to what extent the 50 billion dollars of foreclosure mitigation money in the stimulus bill might have on this number, as the NAHB respondents likely can't give it much weight until details begin to be released tomorrow.
On an economic note, St. Louis Fed President Bullard was out today with cautionary words against DEflation. That's right. DEflation, not INflation. He noted that the current rate of increase of the Fed's balance sheet is NOT sufficient to keep pace with deflationary risks. What does that mean? Well, it means at your next cocktail party, when the flock is lamenting the inflationary plight of the massive "printing" of money by the government and the unnecessary burden that places on "our children," you can point to this tidbit as evidence that policy-makers are more concerned about money getting too cheap than getting more expensive. Indeed, as we peruse numerous publications by economists each week, the consensus is certainly much more concerned about deflation. As a society and simple as "watchers of the news," I think we've been well conditioned to fear inflation above all else. It's worth mentioning that deflation would be just as crushing, if not more so. It's a battle Japan is STILL waging. Scholars of the "lost decade" in Japan have passionately noted that it seems the US has learned nothing from Japan's failure and, in their view, we have been too slow to act, and have not acted with nearly enough "size." That's right folks... The people that have been through this before think we should be spending more and doing it faster. Are they right? Who knows. All I know is that it is not the cut and dry issue that thsoe who say "we can't print our way out of this mess" think it is.
As far as scheduled data tomorrow:
- MBA weekly mortgage application survey - 7AM
- Import Prices - 830AM
- Housing Starts 830AM
- Ind. production and cap. utilization at 915AM
As far as the MBS outlook, we have to remember that despite all of these exciting economic events, MBS will be more resistant to movement than stocks or treasuries. That's part 1. From there, lender rates themselves will be resistant to movements in MBS to some extent as well. Both of those factors normally exhibit much more positive correlation. What does this mean for you and me? Our favorite answer: uncertainty. In other words, despite movement in MBS, certain lenders can actually move rates in a counterintuitive direction due to the numerous reasons for inflated primary/secondary spreads we've been talkin about for so long. Case in point... Today was flat, flat, flat for MBS, yet some lenders repriced for the better by a quarter of a point. This IS NOT something we are used to seeing in the past. We could point to other examples in the recent past where MBS have GAINED, BUT lenders have actually repriced for the worse. So, beyond the standard advice of consulting your GUT-FLOP manual, keep this uncertainty in mind when on a fence with current float/lock decisions. Could floating pay off? Possibly. But there is also plenty of "room" left for further UIC moves, especially if this treasury rally proves to be short lived. I can't help but think that this historic technical line in the Dow will play some role in suggesting that directionality. So let's watch it carefully tomorrow and any adjoining reaction by treasuries. Why treasuries? Because independent of them, MBS have little impetus for significant movements. If spreads widen out to a certain point, expect the Fed to accelerate their opportunistic buying.
On a final note, remember that this UIC stint is a storm to be weathered. It's uncertain how long it will last, but it needs to happen in order to return spreads to levels where the market can mount a meaningful enough rally to push rates decidedly into the 4's again, across the board. Will it happen? Probably, but the TIME FRAME is the biggest uncertainty. One thing is certain though, most anxious borrowers and loan officers would do well to think this over in terms of weeks and months rather than hours and days. Anyone got a hot lead on a cryo-stasis facility? I have a delay of gratification problem.
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