It was a wild downward day on MBS markets and beyond.


As you can see, MBS didn't fare so well on a pure price perspective.  Losses of 22 ticks in 4.0's led to significant reprices for the worse ahead of the release of Stress Test Results and Tomorrow's robust day.  Treasuries also suffered significant losses in the longer end of the yield curve with everything above a 5 yr note losing about a point or more (7 yr note only down 28 ticks, but close enough eh?).  This pushed the yield on the 10 yr note (yellow line) up to 3.34.  This is eye-wateringly higher than the recent range that was testing upside resistance at 3%, then at 3.08%, then at 3.25%.  Indeed, most technical caps lie slain in the brutal path of yield curve steepening.  More evidence for that?  The 30 year lost over THREE full points for a grand total of 3-12.  In terms of the "ticks" we normally use, this equates to 108 ticks.  Ouch... Thankfully, the 30 yr is almost completely disconnected from MBS.

However, the 30 yr, which suffered after a not at all catastrophic auction at 1pm (but apparently not-at-all what markets were hoping for either), did serve to pull down the rest of the longer duration treasuries, effectively causing the yield curve steeping today.  Those longer term durations (5, 7, and 10 yr's) DO have a bearing on MBS.  And because those tsy's lost so much, MBS had to lose some too.  In this instance, the losses were similar owing to "extension risk" where those holding lower coupon MBS fear the overall rate environment rising to a point where they are losing significant money as they are holding loans that no sane borrowers want to pay off.  So their solution is to "sell sell sell."  And sell they did.   Here's the full run down on day over day price changes at the close:


FN 4.0 -------->>>> -0-22  to 99-19  from 100-09

FN 4.5 -------->>>> -0-17  to 101-16  from 102-01

FN 5.0 -------->>>> -0-11  to 102-19  from 102-30

FN 5.5 -------->>>> -0-05  to 103-14  from 103-19

FN 6.0 -------->>>> -0-01  to 104-20  from 104-21


GN 4.0 -------->>>> -0-23  to 99-23  from 100-12

GN 4.5 -------->>>> -0-15  to 101-26  from 102-07

GN 5.0 -------->>>> -0-10  to 103-08  from 103-18

GN 5.5 -------->>>> -0-03  to 103-26  from 103-29

GN 6.0 -------->>>> -0-02   to 104-14  from 104-16


The 2 yr treasury was down only 2 ticks.  This makes sense as it is more closely analogous in duration to our 6.0 (ish) MBS. 

As evidence that MBS didn't suffer disproportionately today as a result of this treasury price route, here's a spread chart showing that, despite much more volitility today than any of the week's previous days, we actually ended the day a bit tighter than we started (the lower the yellow line, the tighter the spread)

This chart covers the whole week so far.  As you can see, we entered the day around 2.15% and fell to around 2.11% by the close.  If we were to expand this chart, we'd see this week's downtrend extends a longer term downtrend in the works since the Fed signed on as "buyer of size."  Spreads are the tightest they've been in a long long time.  But despite this, one of the traders in the Ninja's circle is wise to point out that GSE spreads should not be viewed against their own backdrop in the sense that "we've come so much tighter, can it really keep going?" but rather are more akin to Ginnie paper that weathered the spread-widening storm of the mortgage meltdown unbelievably better than GSE issuances.  At that to Berliner's recent thoughts on the topic and mix in some of mine and AQ's suggestions that we're STILL not in the historically "tight" range, and the nutshell is that there is indeed support for the idea that spread tightening does not need to abate just because "it's been doing so well."

But spreads only tell the part of the story that relates to how well MBS are "equipped" for the game.  If the conditions on the field are awful, we'll still lose.  In this case, mother nature is blowing a foul wind in the form of treasuries.  They are the inclement weather to our MBS team's preparedness and skill.  And even if we're "playing a bit better than the conditions suggest," if the conditions are bad enough, we still play far worse than we would at 72 degrees with no wind or precipitation.  And so we have the following sad types of charts to put in front of you considering the nigh-on apocalyptic performance of late in tsy's.  Their weakness simply too much for MBS to overcome with excessive tightening, MBS are forced back to a place we'd rather not see them, right ON the grey line of impending destiny, which of course is the long term horizontal trend line we keep discussing as providing resistance overhead and support underneath:


Regarding this, our beautiful study in the most basic of trend analysis concepts, we get our 5th retest tomorrow, and this time we're heading into the day not only at the weakest point of all the tests but also testing the endurance of this current bout of "up-range" time as it has lasted much longer than suggested by the previous two range trends (1 up, 1 down, but both just over a month and a half whereas this one is nearing two months).  As you might guess, the dual technical factors of "overstaying our welcome" AND being at the lowest level of any test so far is anything but good news.  If left simply to a technical analysis-based interpretation, there is a much greater chance of further losses ahead than there is of gains.

Fortunately, technical analysis is not the only method that informs our thoughts on MBS directionality.  We have a couple mitigating factors that cast some unknowns on the ostensible disaster.  These aren't necessarily counterpoints per se, but rather considerations that lessen the austerity of present trend circumstances.  If one were to choose a day simply based on calendar events to move money to the sidelines in anticipation of events that would warrant a re-positioning, this would be right up there.  We have the results of the Bank Stress Tests tonight, MBS Class A Settlement beginning tomorrow, Non-Farm Payrolls Tomorrow AM, the release of fresh monthly prepayment numbers for MBS as of yesterday afternoon (but with a digestion process normally lasting days not minutes), stock prices near annual highs, and bond yields just today breaking through topside resistance.  All of these things coming to a head beginning, more or less today could certainly have the effect of normally inversely related market sectors (MBS and Treasuries on one side, stocks on the other) all losing ground on the same day.  We've seen in before and the historical norm is for at least one of the three to snap back higher when more data and headlines cats start exiting their respective bags.

As is always the case when we hit this technical resistance, it could go either way.  Tomorrow just depends on how you want to look at the data.  Some contest that at levels over 3.25%, 10 yr tsy yields are too high for Benny and the Jets.  I for one DO NOT think anything drastic will be announced by way of the Fed expanding its tsy purchasing until Ben and the Gang can determine if this apparent inception of a recovery has legs.  How long that takes them I don't know, but unfortunately, we're not in a dire enough environment to be confident in saying, "Ben won't let these yields go any higher."  Compounding this problem is the technical breakout in 10 yr yields.  This is and was a big sell signal for some.  If stocks rally on decent NFP and welcome stress test results, this statement gains veracity.  Tangentially, we are pushing quite a rally in equities and the urges of bulls cannot be underestimated.  They'd love a reason to keep this rally going.  If they get it, tomorrow could be more of the same.  (update: insterted at 2:05pm) So far, stress test results however have not caused any sort of spike in stock futures.  In fact, futures are down about a hundred points...  Still far to early to call the ball yet, but may lessen the liklihood of catastrophic selling tomorrow for MBS.

If you didn't lock today, not much you can do right now except wait for NFP tomorrow AM, developing reactions to the stress tests, Class-A Settlement balls to drop for MBS, and technically traded momentum to develop tomorrow in one or all market sectors.  The shining beacon of certainty is, as always, that you'll see it coming before your lenders reprice.  So tomorrow is huge.  We're playing an intraday float, but with risk of alarms going off signalling the potential beginning of an extended period of price weakness in MBS.  So though we take no action at the moment, we must be utterly prepared to take it.  So that's loans uploaded and ready to lock online for you 21st century types, lock sheets filled out as much as possible for you paper fax folks, and in either case, terms confirmed with clients etc...  Might not be a bad idea to let your clients know that it might be decision time tomorrow and get their directions in advance (if you haven't already).  Until then, MG Out!