Good Morning All....
Anyone else feeling a bit groggy this morning? No data this AM, abbreviated work week, quarter end activities...not much to snap me out of a sleep induced Monday morning fog. Well that's not entirely true...this holiday shortened week has several important data points scheduled..the major one being the Employment Situation Report to be released on Thursday. More on the week ahead.
Last week the 10 yr TSY note rallied from an intraweek high of 3.79% ,all the way down to 3.50% by week's end. Some say this was a function of quarter end cash coming off the sidelines for window dressing, others point out that the perception of a recovery has evolved into a reality of stabilization and possibly stagnation, many aren't really sure what to say but don't care to think about the "why's" as they prefer to ponder the "when's" of mortgage rates coming down. Here is the week over week of the 10 yr note yield's journey below 3.50%...
Unfortunately the "when's" of mortgage rates coming down involve the "why's" of the yield curve's gyrations. At the moment the street's outlook for 10 yr TSY yields vary widely...indicating the excessive amount of unknowns that are governing the yield curve and therefore mortgage land at the moment. Here are the primary dealer's expectations for the 2 yr note, the 10 yr note yield, and slope of the yield curve by year's end:
The wide range of outlooks has several implications over mortgage world. The dealers who forecast a flattening yield curve are more likely to venture into the "rate sheet influential" side of the stack as prices are still discounted (4.0s and 4.5s). On the other hand, the dealers who see steepening will generally avoid extension risk related MBS coupons...specifically "rate sheet influential" ones. Overall, the diversity of viewpoints may serve as a motive for the majority fixed income investors to simply stray away from the mortgaged-backs that lenders gauge to generate primary mortgage rates. Why? No sense in adding extension risk (cheap or not). Either way the Fed will be there to support the MBS market (but what does that say about their investments?).
The lack of MBS demand was quite obvious last week. While the yield curve flattened, as measured by 2s and 10s, 18 basis points, and benchmarks rallied.....MBS volume was below average and rate sheet influential mortgaged-backs stalled time and time again...
Pre-FOMC announcement, the FN 4.5 was highly range bound (right along with benchmarks). Post FOMC meeting, the yield curve rallied (see above) and the FN 4.5 felt the effects of parnertia...repeatedly!
....pushing MBS/TSY yield spreads wider and illustrating the lack of interest in long duration MBS coupons!
Dont let the price movement fool you here...higher "rate sheet influential" MBS prices were a function of traders updating their price models as the yield curve flattened in an effort to ensure that cheap offers didnt get picked off by day traders looking to catch a cheap play as the bid on benchmark rates got lifted.
Plain and Simple: Better mortgage rates were largely thanks to the yield curve flattening!!! Well, and the Fed too. Last week the Fed purchased $23.75 gross and $22.25 net after sales. Most purchases were 4.5 coupons and 5.0 coupons, 66.5% and 27.2% respectively. The Fed has now used $598bn of the 1.25 trillion that was allocated for Agency MBS purchases...that's 47.8%.
Here is a chart showing the evolution of the Fed's MBS purchase program.
The week ahead, as previously pointed out, will likely be the same as the week that was...window dressers wont venture too deep into duration land (rate sheet influential MBS coupons) as quarter end approaches. After that, there is room for MBS/TSY yield spreads to tighten but we remain skeptical of the street's demand for these long life cash flows (extension risk)....much is dependent upon the economic reports to come as most are not too concerned about prepay speeds after the noticeable slow down in the primary mortgage market...look for day traders to continue to target "up in coupon".
So far this morning MBS market volume is light. The FN 5.0 continues to take its direction guidance from the price behavior of the yield curve...check out the intraday charts:
Notice the directional leadership we are taking from benchmarks?
Hmmm...rate sheets are funny this AM. Some worse, some a little better but not by much. Its month end for smaller shops (busy cleaning up messes) and its quarter end for bigger shops (lack of liquidity in MBS market...not selling new loans. Plus many lenders are trying to get old loans closed to reduce fall out risk).
MBS still range bound...FN 5.0 moderated by 101-25 and 102-00 while the 10 yr yield will find it difficult to break through 3.44% resistance. If the 10 yr does rally on...we would expect high dollar prices to keep MBS gains in check. Range bound! All that said...lenders will be slow to pass along better mortgage rates.
2s vs. 10s: 238bps
MBS Market Alerts
