What a snoozer it was in MBS world today. MBS yield spreads were mixed depending on your benchmark of choice.


FN 4.0 -------->>>> +0-04 to 99-28 from 99-24

FN 4.5 -------->>>> +0-02 to 101-19  from 101-17

FN 5.0 -------->>>> +0-04 to 102-30 from 102-26

FN 5.5 -------->>>> +0-04 to 103-25 from 103-21

FN 6.0 -------->>>> +0-05 to 104-19 from 104-14


GN 4.0 -------->>>> +0-03 to 99-30  from 99-27

GN 4.5 -------->>>> +0-02 to 101-24 from 101-22

GN 5.0 -------->>>> +0-04 to 103-15  from 103-11

GN 5.5 -------->>>> +0-04 to 104-02 from 103-30

GN 6.0 -------->>>> +0-05 to 104-21 from 104-16

Current MBS buy/sell strategy: Buy when MBS gets cheaper...take profits when prices  move higher and yield spreads tighten. The Federal Reserve continues to employ their block buying trading tactics. Although today,  ahead of the release of the March prepayment report, some non-Fed funded trading accounts actually tested out the waters in the production/rate sheet influential side of the MBS stack...but dont expect too many real money market participants to be aggressively seeking out MBS coupons near par as they will look to avoid the negative convexity exhibited by current coupon MBS (and the possibility of extension risk and an unwelcome ride on a duration roller coaster).

Let me explain....

TSY yields shot up around 2pm and we issued a REPRICE FOR THE WORSE ALERT because the price of the FN 4.0 was falling fast. Why?

When benchmark interest rates rise both the duration and maturity of "out of the money" (at par or below par) MBS coupons lengthen. The farther out of the money an MBS coupon is the more it's duration and maturity will extend when benchmark rates rise (because those borrowers have no reason to refinance). By definition the negative convexity of an MBS coupon is greatest when the duration curve is steepest. The duration curve is at its steepest when prepayments are most sensitive to changes to in interest rates (when current primary/secondary spreads are wide...like right now). 

At the moment the MBS coupon most affected by negative convexity is the 4.0 (the MBS trading closest to/below par). So this afternoon when the yield curve steepened, MBS investors did not want to be stuck in lesser yielding MBS coupon because that coupons duration and maturity were extending....the 4.0s extension risk was increasing!!!

Plain and Simple: MBS buyers dont want to be stuck in a fixed income investment that isn't keeping up with its benchmark...if interest rates move higher this implies they could be reinvesting their money in a higher yielding debt instrument...they could be making MORE CASH FLOWS!!!! That is why certain note rate prices on your rate sheet may have jumped from 98.500 to 95.500 in a two day time frame. Quiet marketplace + slow flows + near average/below average volume + steepening yield curve + "up in coupon" bias with slight anxiety about paydown factors + no need for production supply = par ysp on rate sheets to lessen in the AM?

DU REFI PLUS LENDERS: So far the list of mainstream lenders that I have compiled who will accept DU REFI PLUS are :  Wells Fargo, Suntrust, Countrywide, Chase, M&T, Citi, Everbank, Met Life, BoA, and Flagstar. If you know of another lender please share HERE.

The release of the March prepayment report indicated that prepayment speeds did indeed slow in March. The market was however expecting prepayment speeds that prepayment speeds would slow a bit more then they actually did....more on this later

Carolina or Michigan State?