MBS LUNCH: TSYs Outperforming. Watch for Reprices
The "flight to safety" rally on the yield curve is blowing the doors off of "rate sheet influential" MBS!!!
While benchmark TSYs are holding early session gains, "rate sheet influential" MBS have refused to sustain price appreciations. This illustrates a few technical behavioral habits of a bond with an embedded call option. To keep it simple I will say the market is not willing to chase the yield curve rally because there isnt much room for MBS prices to keep rallying (negative convexity)...at least not until TSYs confirm this "flight to safety" TSY rally has legs. Reminder: in a flight to safety rally, which is what we are witnessing today... risk free TSYs whip everyone elses butt (TSY outperform) as the market looks to confirm the extent to which money flowed into the yield curve.
Plain and Simple: MBS investors are waiting to see if the stock selloff induced TSY rally will hold. MBS investors are waiting for confirmation. Darn negative convexity...
The FN 4.5 is feeling the effects of PARNERTIA and NEGATIVE CONVEXITY!!!! Near the lows of the day....
Some price leader type lenders might pull the trigger on a reprice for the worse. Be warned!!! Negative Convexity in play...