AT A GLANCE RECAP
- - 4.5's improve 13 ticks, 5.0's up 9
- - Subtantially lower-than-normal volume
- - Ginnies lose vs. Fannies After Donovan's comments imply added supply
- - Traders waiting for clues from FOMC Announcement
- - Tomorrow: Auctions begin, existing home sales, FHFA price index
It was a good old-fashioned "low volume" day with less than half the 30 day average in trades coming through. To add to the sense of "waiting for Ben," the low volume also traded in a norrow range all day. Since noon, priced did not vasicillate more than 5 ticks, and kept within a 10 tick range the entire day. Things kicked off in the green following the World Bank's revision to growth estimates, now projecting global growth down 2.9% versus the previously seen slight gain of 1.7%. This news led treasuries higher in the nocturnal session and MBS--ever the dog on a leash--followed the yield curve with a little bid side help from the Fed.
The primary cause for the low volume and narrow range was quite a shocker: many participants reported waiting on guidance from the FOMC on Wednesday. Whether the announcement contains relevant information or is as equivocal as possible, even the absence of headline-worthy policy would give traders enough to draw some sort of conclusion about things to come during this apparent crossroads.
Today's limited volume and range did see one notable exception: Ginnies. For instance, whereas Fannie 6.0's gained 5 ticks, Ginnies gained only 1. This brought the price gap (which you might hear us or others refer to as GN/FN swaps) to nearly 10 ticks on that 6.0. 4.0's are also a wide 11 ticks. So why did Fannie get more love than Ginnie today? Traders pointed to a weekend speech from HUD Secreatary Donovan in which he mentioned:
"We are asking Congress for the authority to endorse up to $400 billion in authorization for FHA insurance, in light of the substantial increase volume we've seen in the last two years. We expect that increased authority will allow HUD to endorse approximately two and a quarter million mortgages."
Long story short and simple: if such a thing does come to pass, it means more Ginnie Mae issuance. Then it's simple supply and demand as the supply side of the GNMA equation would be increasing, thus potentially pushing prices lower. It's all theoretical at this point, but whatever the case, this--in addition to Asia's recently discovered ability to buy Fannie/Freddie MBS--would be the reason we're seeing Ginnies underperform recently.
Tomorrow we get our first of three chances to find out if treasury auctions can carry on in the recent tradition of posting palatable (if not appetizing) auction results given the lower yields than those of two weeks ago. In other words, "Y'all were willing to buy this stuff 20bps ago, how now?!" If Bid-to-cover, high yields, % taken at high, and indirect bids hold firm to a remotely respectable extent, this could go a long way towards preventing any major selling before the FOMC announcement everyone's waiting for on Wednesday.
As always, we'll get you the auction results as soon as they're out and more importantly, let you know the minute by minute market reaction. If auction results are favorable, and nothing too damning comes out from the Fed, things will look good, but there is no greater chance of this than a mixed bag, or even a one-two punch that sends us back to the underworld. Stay tuned...
Today's Charts
In other news the MBA reduced its outlook for originations over the next year. AQ WROTE A STORY ON IT
MBS Market Alerts
