MBS MORNING: Going Deeper into Trading Flows
Trading as been seasonally slow in the secondary mortgage market today. In the "to be announced" sector, mortgage originators have locked about $700 million in loans aka locked in the spread against their pipeline of deliverable loans aka the loans you are closing!!!! Make sense? When prices are near the topside of the range, big banks lock in, just like you should be doing. This is a normal function of the TBA mortgage market.
Heading deeper in trading flows, there is a decent amount of activity going on in the market for seasoned/specified pools of loans. We've seen two 5.0 BWIC (bids wanted in competition) totaling almost $2 billion so far today. Dont worry I can explain...
At the beginning of every month, principal prepayments from the previous month are reported. Sometimes your pool of mortgages prepays faster than expected. Not good if you paid a premium for that pool! (If you paid less than 100-00 thats great because you get paid back at par!) That said...many MBS investors look to protect against unexpected prepays.
To protect against prepayment risk often times accounts will sell fuller premium coupon MBS (fuller coupon = higher rate= more chance of borrower refinancing) in favor of a coupon with less prepayment risk...aka heading down in coupon (rate sheet influential MBS). There is however another way to hedge against unexpected prepayments....by purchasing a seasoned pool. Seasoned MBS pools have proven track record, meaning they are aged, or were originated several months ago...their performance has been proven.
Well...at the beginning of the month when accounts are getting nervous about their portfolio's vulnerability to unexpected prepayments, demand for seasoned or specified pools increases. To accommodate for this skittish sentiment, some traders will make them available for bid, with hopes they get bid higher (at a premium to TBA MBS). Which is what we are seeing today!
Anyway...
The FN 4.5 is pretty much unchanged from the last post we wrote. -0-04 at 100-24. Its been a sideways sort of day..."wait and see" NFP.
Here is the two day perspective...
Yikes that doesnt look so hot. Dont fret...the zoomed out view is a calming influence. Its not so bad!
In other news...
At 11AM the Treasury Department announced the terms of next week's 3s/10s30s auction cycle. All offerings increased by $1 billion...in line with expectations.
Tuesday Sept 8: $38 billion 3 yr notes
Wednesday Sept 9: $20 billion 10 yr notes
Thursday Sept 10: $12 billion 30 yr bonds
That's $70 billion in total for the week....raising around $55billion in new cash for TSY.
Rate sheets are as expected...worse than yesterday. We really hope you locked in a good portion of your pipeline this week. Although we are hopefully optimistic that sentiment in stocks is finally favoring a selloff...nothing has been confirmed and even then lenders dont have a great track record of keeping up with gains in the MBS market (at least when current coupon falls below 4.25 they dont). Since most readers only have one hedging outlet...locking (ugh best efforts is so expensive). We suggest you GUTFLOP accordingly.
WAIT AND SEE until tomorrow morning= range bound
Current Coupon: 4.365%