Today, new found short term stock market optimism resulted in the Treasury market selling off and MBS prices cheapening up a few ticks. A few lenders repriced for the worse....

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


FN 4.0 -------->>>> -0-04  to 99-29  from 100-01

FN 4.5 -------->>>> -0-02  to 101-25  from 101-27

FN 5.0 -------->>>> -0-02  to 102-29  from 102-31

FN 5.5 -------->>>> -0-01  to 103-21 from 103-22

FN 6.0 -------->>>> -0-01  to 104-15  from 104-16


GN 4.0 -------->>>> -0-02  to 100-04  from 100-06

GN 4.5 -------->>>> +0-00  to 102-04   from 102-04

GN 5.0 -------->>>> -0-01  to 103-15  from 103-16

GN 5.5 -------->>>> +0-00  to 103-30  from 103-30

GN 6.0 -------->>>> -0-01  to 104-10  from 104-11

Since late March, when a three week stock market rally lost steam, equity markets have been searching for government hints regarding the REAL financial status of the major market participants of the US banking system. Rapid job losses and record government spending have even begun to overshadow the initial confidence that resulted from the Obama Administration's release of its plan to save the world. Today Treasury Secretary Geithner touched on a topic that struck the nerve of stock market sensitivities....he made one of those "headline news" statements that moved money....

"Currently, the vast majority of banks have more capital than they need to be considered well capitalized by their regulators"

Those comments combined with several other "toxic asset" /balance sheet friendly statements sent financial stocks on a mid morning run that never turned back...and unfortunately flows moved out of the Treasury market and yields rose...

...which gave MBS coupons downward "directional guidance" for the day.

Geithner didnt have much juicy content in his prepared testimony. The prepared text was intended to add transparency on the Treasury's expectations regarding the use of the remaining $135.6bn in TARP funds.

Out of the $700bn allocated to Treasury through TARP... $117.4bn has been used to recapitalize banks like Citigroup and Bank of America, and auto companies like Chrysler and GM....a good portion went to insurance giant AIG. All of which had good use though...even if just as a psychological support system. I know many will mutter under their breath here but I feel it is important to point out that the failure of Lehman Brothers led to an exponential "worsening" of financial and economic conditions... not to mention the further deterioration of the already battered mindset of consumers and investors.

And remember that since the failure of Lehman Bros. the Fed's balance sheet has grown from $946 billion to over $2 trillion (more than double in less than a year).....and....the labor market has still shed in excess of $4 million jobs....all since the failure of Lehman Bros...less than a year ago! I ask: what would haveresulted from the failure of another "to big to fail"bank? Perhaps the early arrival of the end of the Mayan calendar? Who knows but things would be considerably worse if capital injections were not made directly into the financial and banking system by the US Government.

Geithner then went on to outline the expected use of the remaining TARP funds...

1. More relief to financial institutions and auto makers .2. The Capital Purchase Program (CPP). About $218bn for CPP. ( 3. Housing Related Programs will get at least $50bn...with another $25bn available. 4. Programs to promote Consumer and Business Lending (TALF)...$95bn. 5. $100bn for the Public  Private Investment Program (PPIP/Geithner's Legacy Asset Plan).

Following the sell off of TSYs,  MBS showed some resiliency but mortgage prices caved to the selling pressure late in the afternoon (see chart). I know you dont like to see red because it gives lenders (who mostly already locked: READ MORE) the option to adjust pricing to current market. But there is a positive one can take from today's MBS session...and its an "ol faithful" type of positive. As rates sold off (TSYs selling) and the yield curve steepened up a few bps...MBS yields and prices were resistant to the selling pressure (that was imposed by Treasury selling)...a behavior that has been consistent during the time the Federal Reserve has participated in the mortgage market. So we take some solace in the fact that, for the day,"rate sheet influential" MBS coupons outperformed their "relative value" benchmark  (MBS/TSY yield spreads tightened up).

Yes I know...the RED meant REPRICES...but dont forget that MBS coupons are still quite "rich" and in order for non-Federal Reserve market participants to "want to" or even "be able to" move their MBS positions "down in coupon", will require that the current rich/expensive prices of MBS coupons cheapen up a few ticks. PLUS originators will have to start ramping up production of new loans (because real money and levered MBS  investors dont want to get stuck in an expensive coupon that is exposed to extension risk: READ MORE ABOUT CONVEXITY AND EXTENSION RISK). 

Data Releases Tomorrow...

  • The IMF will release its World Outlook Report
  • At 7AM the Mortgage Bankers Association will report "Weekly Mortgage Applications". Lenders have been passing through MBS price gains over the past few days so we suspect a few borrowers jumped off the fence...we dont know how many of those borrowers are new applications though....did you take more new applications this week?
  • At 9AM the FHFA Monthly Home Price Index report will be released by the US Government.
  • Treasury Secretary will be on Capitol Hill again giving more insight into government spending programs.
  • and Wells Fargo announces earnings ....

Also Tomorrow : The MBS trend channel has been narrowing and is nearng a price point that will require new direction.Matt and I take another look at long term MBS price trends and their implications on your rate sheets.