Stocks are trading to the downside following weak economic reports (jobless claims and housing data) indicating the economy is still in search of a bottom...meanwhile the belly of the yield curve (5/7/10 yr TSYs) is drifting around a non-reactive 3 bps technical range. Benchmark TSY's lack of a reaction to weak econ data (and the consequential sell off in stocks) furthers the premise that debt buyers remain defensive ahead of the TSY supply announcement in 5 minutes.
So far this morning prices of mortgage-backs have moved marginally higher while Treasury market participants adjust their open positions to account for yet another round of US debt monetization (TSY drawing money out of private markets to fund deficit spending...implies less capital for private investors to spend). MBS/TSY yield spreads are 3 ticks tighter...so mortgages continue to show resiliency and insulation from broad market flows (when convienent).
FN30________________________________
FN 4.0 -------->>>> +0-02 to 99-30 from 99-28
FN 4.5 -------->>>> +0-00 to 101-23 from 101-23
FN 5.0 -------->>>> +0-01 to 102-29 from 102-28
FN 5.5 -------->>>> +0-00 to 103-20 from 103-20
FN 6.0 -------->>>> +0-00 to 104-15 from 104-15
GN30________________________________
GN 4.0 -------->>>> +0-02 to 100-04 from 100-02
GN 4.5 -------->>>> +0-00 to 102-00 from 102-00
GN 5.0 -------->>>> +0-01 to 103-15 from 103-14
GN 5.5 -------->>>> +0-00 to 103-28 from 103-28
GN 6.0 -------->>>> +0-00 to 104-08 from 104-08
Higher MBS bids come at a time when the mortgage market is priced rich and looking for new direction. As we are near the end of a trend channel that began when the Fed announced it would fund an additional $750bn Agency MBS transactions....it is time to look at possible paths we are setting up to travel. At first glance it appears that we are doomed to head sideways into a tight trend channel...thats ok though....
Jolting this sleepy sideways bias may require some heavy handed "headline" events/announcements". Perhaps either more mortgage/housing/MBS specific headline news OR on the flip side...the Fed would have to put a pause on their open market Treasury purchase program and let the yield curve steepen. The latter is unlikely when you consider the breadth (and need) of the Fed's participation in credit markets (not to mention the extent of their qualitative easing programs.
Since we have been taking our directional guidance from TSYs it is also necessary to discuss the stock market and its effect on TSY flows. Besides the factors I discussed YESTERDAY....equity traders must account for the possibility of a GM bankruptcy...and weaker than expected bank "stress test" results. Furthermore this morning's release of jobless claims data indicates that continuing claims are still on the rise...a sign that labor market contraction will continue through 2Q 09. All these variable paint an unclear road ahead which will make it hard for the stock market to trade with any conviction. No conviction = buy on dips...sell on rips= ups and downs and FAST MONEY trading.
All that said, given the behavior of mortgages and the Fed's willingness to calm rate volatility....our first glance interpretation of the "road ahead" may be accurate...sideways trend with a relatively tight channel. Unless of course more appropriately timed "headline" news rears its head....
Yesterday originators committed to deliver $4bn more MBS ($3bn supply sold by mortgage bankers). This "forward commitment" locks in pipeline profits and allows lenders to focus their pricing behavior on factors besides MBS price fluctuations (what fluctuations???) like the strategies of competitive lenders and their own balance sheet gaps. As for the implications over your rate sheets, if recent primary/secondary spreads hold...the timing of yesterday's originator "supply dumping" would imply that you might be losing some yield spread over the next few days (relative to the more aggressive pricing we have seen since March 18) .
MBS Market Alerts
