Today was not a stellar conclusion for MBS as we fell back to more or less average levels for the week.  Here is the entirety of today's action:

As you can see, we ended more or less close to the lows of the day.  Keep in mind that a lot of that weakness takes place on a Friday afternoon, which is traditionally rather illiquid, light in volume, and artificially choppy.  In other words, don't read too much into the late weakness until it's confirmed or refuted on Monday.   Plus, in the grand scheme of the last 5 days, today was pretty good.  Here's a long lost friend of a chart, a 5 day tick by tick!

In fact, today was our best day of the week in terms of terms of how much time was spent at the higher price levels of the week.  Late weakness coincided eerily with the lunch hour!  This is not a joke folks!  The fact that many button pushers and market participants might decide to take off after lunch on a Friday can leave an imbalance in the markets that could account for some of what you're seeing in the charts today.

The treasury market didn't fare quite as well as MBS.  You can see in the following chart, the 10 yr note (in red) generally declined in price this week whereas MBS ended a bit higher.


If we were to draw the same chart, but in terms of yield, it would look a bit different.  Keep in mind, the two lines below are not sharing the same y-axis range, so one must simply observe that tsy's moved in around a 20bp yield range whereas MBS were within 10bp yield.  In other words, MBS were much more stable as tsy's lost ground (up in yield). 


As you may have guessed, when tsy yields rise FASTER than MBS yields (which, in this case didn't really rise at all, but rather fell a tiny bit), this is the definition of SPREAD TIGHTENING.  So what if we took a 5 day look at the actual difference in yield between the two?  We'd have a spread chart that indicates, as the one below does, that spreads got smaller on the week, aka "tightened."  In other words, the yields on MBS dropped to be closer or tighter to those of comparable treasuries.  In this case, we're looking at 4.0's vs. 10 yr tsy's.

Spreads bottomed out on Thursday following Wednesday's much maligned treasury auction, but were brought back in line with Thursday's more successful auction. 

In addition to the treasury auctions, several other factors drove the market this week.


We are seeing the return of a few long forgotten friends in the MBS market: originators selling, and someone other than the Fed helping out with buying.  AQ did a great job discussing this in previous posts.  But to reitterate...   Originator supply picked up to an average of $3.4 bln per day and was split between 4.0's and 4.5's.  And although the Fed stepped up to the plate with the heavy lifting on the buy-side (buying $33.2 bln net this week, by far their most on record), other market particpants joined them to readily soak up this heavy supply.  Foreign buyers continue to be more interested in Ginnie MBS viewing it as a safer investment than GSE paper.  This may shift a bit this year and we could see Asia pick up some more agency paper, but it would be a gradual process at best.  Volume for the week was slightly higher than normal.

The supply and demand story did its part to keep MBS strong this week relative to tsy's and swaps, but outright price fluctuations followed technicals, headlines, and data releases.  Some of the highlights:

  • The Geithner Bad Debt Mop was unpackaged on Monday to much fanfare.  Upon further detail gophering, analysts and pundits were all making with their best martha stewart impressions noting: "It's a good thing." 
  • New Home Sales unexpectedly ROSE 4.7% to 337k. 
  • For the first time since February 2008, the FHFA house price index (purchases only) ROSE 1.7%
  • Existing Home Sales rose 5.1% in February versus a consensus calling for an 8% decline.
  • Slipping under the radar was the introduction of House Resolution 1728, which would strengthen restrictions on YSP-based compensation.  More to come on this as we dig into it.
  • The senate and congressional budget committees approved Obama's 3.6 trillion dollar budget which move to the full house and senate this upcoming week.
  • Mortgage Applications were up 32.2% this week.  That's a big 'ol jump.  But remember, that was for the week ending March 20th.  This coincides with Freddie Mac reporting their lowest average rate ever of 4.85%.  That was down .13% from last week.  Further bullish readings are expected next week for applications.

As far as the week ahead, some things to keep in mind:

  • Month End!  Meaning we get Non-Farm Payrolls and a historically supportive time for MBS.
  • There will also be some anticipation trading ahead of the prepayment report on the 5th.
  • shorter term T-Bill auctions announced on Monday.  No big whoop.
  • Case Shiller comes out on Tuesday, should be interesting to see if it coroborates FHFA, also on tuesday, NAPM, consumer confidence and Fed's Plosser speaking at 1pm. 
  • On Wednesday, we get MBA purchase applications, the "take it or leave it" ADP jobs #, pending home sales, construction spending, and ISM
  • Most pertinent on Thursday are jobless claims and factory orders. 
  • Friday could be fun with NFP early, followed by ISM non manufacturing at 10 and Uncle Ben himself speaking at Noon.

Combine all that with another slew of headlines and legislative drama plus the penultimate trading week before April Conforming MBS settle, and it looks to be another exciting week in mortgage land.  Join us, won't you...