MBS MORNING: Waiting for Originators to Protect Their Pipelines

Following weaker than expected retail sales data, production MBS coupons (the ones that determine your rate sheet pricing) are holding their gains while Treasury traders set themselves up for another opportunity to take profits (10 yr trading above significant technical resistance price point...very susceptible to fast money selling) . This behavior would further demonstrate the bond investor's bias to "sell into a rally" or in more simple terms, it will illustrate the market's disregard for a "buy and hold" portfolio management strategy. These short term range trading tactics may continue to dominate market flows until the Fed gets fed up (haha) and decides to use their bully pulpit to push the 10 yr note yield back below 3.00% (and 2s/10s under 200bps)..or their checkbook!

In MBS world, this isn't much reason to worry. As has been the case, over and over again, when Treasuries sell off MBS have held firm on the Federal Reserve's block buying/supply consuming/liquidity restoring/selloff stabilizing $821bn market presence.

This morning trading is once again light. As MBS dollar prices move higher (bids) we expect originators will initiate pipeline protective actions in an effort to hedge their rate sheet commitments from interest rate risk (higher rates)...this can be viewed as mortgage bankers taking some profits (higher prices = opportunity to GUTFLOP). The remainder of MBS market remains defensive of this event's occurrence. Although most money manager and levered accounts (accounts who use borrowed money to buy MBS..they must trade with positive carry...or asset value > liability cost) continue to meddle in "up in coupon" positions, these investors will gladly greet this originator "pipeline hedging" (locking in loans) with a brief round of profit taking of their own. This selling will allow the prices of 6.0s and 6.5s to cheapen up a few ticks (wow they are rich prices) so the profit churning cycle can once again recommence. Yaaawn...

Plain and Simple: higher prices of "rate sheet influential" MBS coupons will allow mortgage bankers to take some profits, this may result in a "reprice for the worse" alert. Stay attentive if you are floating because this event becomes more and more likely as the FN 4.0 ventures further into the 100 price handle (and 4.5s get closer to 102-00).However, locking in at high MBS prices does allow lenders to pass along more aggressive YSP...which most of have holding back!!!!! On the other side of the stack...."Up in coupon" MBS....this originator pipeline protecting event will serve as an opportunity for market participants to take some profits of their own...however these MBS investors wont let these coupons get too cheap before jumping back in for a "bargain buy". Up in coupon = less volatile.

Wait wait wait...is their a pipeline to protect? How is your pipeline looking? Slower than usual??? Gimme some feedback on your activity lately...how much is HVCC hurting you?

RANGE TRADE RANGE TRADE RANGE TRADE....ring the register....RANGE TRADE RANGE TRADE RANGE TRADE....ring the register

Currently the 10yr note is trading +19/32 yielding 3.107%, 2s/10s are a few bps flatter to 223.76bps, and the Dow is down 138 points to 8330. As for MBS....

Since 5pm "Going Out" Marks....

FN30________________________________

FN 4.0 -------->>>> +0-07 to 100-06 from 99-31

FN 4.5 -------->>>> +0-07 to 101-31 from 101-25

FN 5.0 -------->>>> +0-07 to 102-30 from 102-23

FN 5.5 -------->>>> +0-07 to 103-25 from 103-18

FN 6.0 -------->>>> +0-02 to 104-27 from 104-25

GN30________________________________

GN 4.0 -------->>>> +0-03 to 100-05 from 100-02

GN 4.5 -------->>>> +0-05 to 102-03 from 101-29

GN 5.0 -------->>>> +0-09 to 103-22 from 103-13

GN 5.5 -------->>>> +0-08 to 104-09 from 104-01