Today, the Fed announced the second leg of its Agency MBS Buying Program.  Pundits and experts alike have been pondering the fate of the mortgage market come July 1st when the our current meal-ticket--the original $500 bln of the buying program--dries up.  Some suggested rates would inevitably creep higher with the hungriest kid on the playground exiting the lunch line.  Others, like most of us, thought--perhaps presumptuously--"if the Fed's done this much so far, and the underlying reason is their commitment to bring mortgage rates down in order to mitigate the financial turmoil, then surely they'll do "something" after the first 500 bln."  You know?  In for a dime, in for a dollar.

Or should that be "In for five dimes, in for a buck twenty-five?"

Today's announcement pegged Q3 and Q4 Uncle Ben contributions at $750 bln!  That's a face-melter kids!  And several months sooner than many would have expected to boot!  Dame fortune has smiled on MBS today!  Of course we'd expect reprices for the better and improvements in MBS on the heels of news like this and indeed this has been the case.  Take a look at the intraday 4.5 coupon:

Kinda sideways and low-volume-ish into the FOMC announcement, then Emeril shows up, and BAM!  Would you like another 100bps of YSP McLovin Sauce on that?  Sure you would....  There are some additional positives here.  Probably of most importance to us is the fact that several lenders have already coughed up a good deal of these gains.  We won't get into specifics, but we've gotten some reports of crazy low rates with crazy good YSP.  I've seen some of these on my rate sheets and confirm.  Whatever the case, the fence sitters that were waiting for some particular rate likely now have it.

The last time we had a day like this was the day the fed started their 500bln buying.  And though the 750bln buying won't start until July, no skepticism needs to be built into the gains because we know Benny and the Jets ain't messin' round.  You want to see what's happened over the past few months?  Take a look:

You can see our old friend January 6th as the last face-melting rally.  We didn't quite crack those levels today, but tomorrow is a new day.  The other thing about Jan 6th is that it came at the END of what many rightfully guessed was an unsustainable rapid rally.  In fact, as shown by the red line, it marked a dark passage through the entire month where we consistently got capped out by the magical technical red line of death.  An acceptable correction.  We cracked it just before mid February and as we used to be fond of discussing a technical ceiling, once violated, becomes a technical floor.  Indeed that held true, but not a big leap of faith for those who had been holding out for that whole "in for a dime, in for a dollar" mentality.  What was disturbing during that time frame was another horizontal price ceiling discussed yesterday at 101-10 on the 4.5% coupon (the horizontal yellow line).  TWO MONTHS without closing above it!  BUT!  We had the "higher lows" trendline begin to form in March (ascending yellow line).  Two trains left the station, and it was plain to see they would run into each other.  And when "whatever was in the middle" gets squeezed out, we have our old favorite: the triangle.  Well, sorry to be a party pooper, but it looks like we'll only have had one short day of tracking this triangle as the graph above shows that it was demolished today.  Sure, we'll need to wait for confirmation tomorrow, but c'mon...

Again folks, this is good for MBS.  It's another phase in what has been an utter reinvention and redefinition of this marketplace.  Ben's guns are blazing.  Washington said (in not so many words) that it was serious about lowering rates on mortgages as an integral part to our economic recovery.  Promises are being kept.  Yeah yeah yeah...  We'll have more primary/secondary spread issues to deal with in the coming weeks.  Lenders will be overloaded.  Turn times may get out of whack.  Rates may not track with MBS every day.  But that's why we GUT-FLOP.  The GENERAL trend in mortgage rates for the foreseeable near term future is low low low.  As with any renaissance, there is no script, and there will be unexpected eventualities.  Analysts will be setting themselves to the task of predicting how the markets will deal with the new discount coupons that, until now (probably), have not seen much action: 3.0's and 3.5's.  FOR ANY CONSUMERS READING THIS: THAT DOES NOT MEAN RATES ARE GOING INTO THE 3's!  We're just talking about the MBS coupons that underly mortgage rates.  Rates in the 4's?  Sure.  3's?  We'll talk later.  Look...  The point is that many of the players will now be playing the game with an unfamiliar set of equipment.  Unfamiliarity = increased risk = hedged margins here and there.  Same thing we've been dealing with, but now we know more about it ahead of time.

But believe it or not, MBS weren't the stars of the party today.  Treasuries crushed MBS, beating their mortgage-backed brethren into the nether regions of recent spread gappiness.  Of course we have been a broken record about spread widening when price rallies occur, but this was something special for the 'ol risk-free benchmark boys.  Oh yeah...  I guess that would probably be because the Fed also announced that would buy on the 2's10's to the tune of $300 bln.  Those treasuries have been a fickle mistress of late, but it looks like Uncle Ben got her number today.  10yr rallied over FOUR POINTS!  How do you like them apples?  Take a look at 4.5's versus the treasury duration to which they're likely most comparable (who knows anymore though!?), the 5yr.

Now keep in mind, this is YIELD versus YIELD, which must make some modelling based assumptions on prepayment speeds in order to calculate a number for MBS.  So there is some subjectivity in here based on a prepayment model which we frankly find a bit slow.  Also keep in mind that the lines are not on the same Y axis.  They are color coded so you can see tsy's dropped about double the % yield as MBS.  Smack Down.

To clear up just how different the performance was, I took the yield based on those prepayment assumptions, subtracted the tsy yield, thus providing you with the following chart of the actual spread.  As you can see, spreads blew up like Kirstie Ally on an "on" cycle.

What does it all mean?  Nothing too complicated as far as your borrowers and curious non-industry folks at your next cocktail party are concerned.  The Fed is spending more money in the MBS market, meaning more demand for mortgages, meaning they can be offered at lower rates.  They are also spending money (unprecedented) in the treasury market, which--as opposed to MBS announcement which was somewhat expected--is a MUCH needed amelioration of supply concerns as well as fear of diminishing overseas demand.  The net effect is that treasuries improved a TON.  MBS a smaller ton.  Short term, mid term, long term?  Well, it's safe to say there's nothing to panic about tonight.  And even safer to say that all of the pertinent considerations you're dying to hear about will be the center of discussion here in the coming days and weeks.

Graham Out...