MBS AFTERNOON: Reminder...Today is Notification Day
I am going to open this post with a bit of insight from the lock desk. During the settlement process, the odds of one encountering an unexplained reprice for the worse are notably higher.
That said, the FN 4.5 is 7 ticks off the 101-10 intraday high....currently trading at a bid side price of 101-03. Given the sensitivity of market liquidity and the general focus on settlement...the notion that some lenders may decide to republish rate sheets is not out of the question.
Onto more enjoyable content...
Check out the trend channel since the 10yr auction yesterday...tight (like a tiger)!
Look at the zoomed out view now...
WOW. Does it feel like we've been rallying since early August?
Not to me. I suppose the chopatility has jaded my perspective.
In intraday MBS market trading...
Volume was pretty much on average today. After outperforming TSYs all morning...rate sheet influential MBS coupons lost some ground to their benchmark big brothers following the 30 yr bond auction. At 3pm when closing marks were recorded, the FN 4.5 and FN 5.0 were a few bps wider to the 5/10yr TSY blend.
In terms of specific buying/selling...remember a few days ago we were talking about "real money accounts" moving down in coupon for a variety of possible reasons?
Considering the choppy nature of the yield curve and continually slow prepayment speeds...it's funny that "rate sheet influential" MBS coupons outperformed TSYs today. The best explanation we can offer is that MBS investors are anticipating that the market will need to buy convexity (current coupon) in the near future. Perhaps buyers are simply putting themselves in a position to serve the needs of accounts who must move down in coupon (out of necessity) if the yield curve rallies? Also...one could point towards today's down in coupon rally as a "buck the trend" trade ahead of Class A settlement, which is looming this week. Or maybe the fact that prepay speeds were once again SLOW played a general role in today's increased demand for agency MBS.
Well those "down in coupon" buyers were taking profits this afternoon. Speculative or not...those trades made money.
Dont forget that today is Notification Day...this means MBS prices will seemingly drop at the end of today's session. In reality this shouldnt show up on screens until the AM...but usually we see it drop on notification day after 3pm close.
If you are new to the site or just havent read this yet....HERE is an explanation of WHY PRICES SEEMINGLY DROP ON NOTIFICATION DAY
FYI: At the moment the October FN 4.5 is trading at 100-24. Thats where we will open tomorrow morning.
Bobby Downey asks:
AQ is the looming settlement preventing us from reaping the full benefits of a rally?
MBS Point of View: Settlement has played a role in MBS outperforming TSYs this week. Slower than expected prepay speeds, the street being short MBS, and the behavior of the yield curve have all contributed to recent price positivities for loan officers. Month end/month beginning MBS supportive events were quite obvious this month!
Rate Sheet Point of View: Yes some lenders will bake in "the drop" ...but most should already have "the drop" priced into rate sheets as they have already starting filling October buckets.
PS...Atlanta Fed President Dennis Lockhart (FOMC voter) spoke in Jacksonville today. He made a few specific comments re: Fed MBS purchases in the Q&A. Before I tell you what he said, remember that the Fed's exit from the MBS purchase program has been on the radar of traders for quite some time now...so what he said was nothing new to the MBS market. Here are two bullet points of interest...
- Tapering of Agency MBS purchases program needs to be discussed at next meeting
- Not inconceivable that Fed doesn't use all appropriate MBS purchase program funds
Here are a few key quotes from his prepared statement:
- Manufacturing production numbers improved in July after eight months of decline, but this performance mostly reflects a surge in auto production, perhaps in anticipation of the "Cash for Clunkers" program.
- Overall, It is to be expected at a time like this that the vital signs of the economy are mixed. Some indicators are improving while others are not getting worse or are just declining at a slower pace.
- Over the medium term, I see a slow recovery with ongoing repair of the financial sector and structural adjustments in the broad economy.
- There are risks to even this lackluster outlook. One risk I'm watching is the interplay of commercial real estate and the financial sector.
- Despite the recent growth in U.S. public indebtedness, the level of debt is still manageable. But the trend is unsustainable and in a less stable country would spell trouble.
- I believe the independence of the Federal Reserve is crucial to the world’s perception that the United States will continue to pursue responsible monetary policy. This perception is an essential underpinning of a calm, reasoned, and favorable assessment of U.S. country risk.
- I welcome further discussion on ways the Fed can be more accountable and transparent but always within the context of maintaining the monetary policy independence that has proven effective in the pursuit of broad economic goals.
- Central concern of Fed policy is WHEN TO RAISE RATES
NO BIGGIE