MBS AFTERNOON: Pipeline Management Considerations
Whats good people...
Heading into the 5pm "DONT TRY TO FILL A LARGE ORDER" marking period, the FN 4.5 is trading -0-02 at 101-10 yielding 4.3391%, the FN 4.0 is -0-01 at 99-02 yielding 4.1058%, and the secondary market current coupon is 4.211%.
Here is the two day FN 4.5...
It wasnt a very busy trading session for mortgages. Much of the action took place this morning between 9AM and 10AM. As prices ticked higher banks were profit takers (as expected) while servicers were adding duration to their portfolios (rate sheet influential MBS coupons). Supply from originators was reported to be in the $2billion area. Hmmmm...thats not too much supply of new production MBS. We would normally expect a little more originator locking at these HIGH PRICE LEVELS. Has SEPTEMBER BEEN A SLOW MONTH FOR YOU? Maybe it reflects the primary market's focus on closing...it is the end of the month afterall.
We dont usually discuss government paper but today something odd happened in the GN sector today. Our GNMA trader contact told us to take a look at GNIIs...so we did....and we were surprised to see GN II's trading better than GN I's. To relate to rate sheets...have you ever seen a GN I paying more than a GN II?
We havent. If you dont follow....GN I's are the GOVIE grids with only whole and half increment coupons. For example: 4.0, 4.5, 5.0, 5.5, and 6.0. GN II's are priced in 1/8ths. For example: 5.00, 5.125, 5.250,5.375, 5.50. Anyway you have probably noticed that GN I coupons are always priced more aggressively than GN II's.
Plain and Simple: this is an odd event. The best explanation we can offer is that there must have been CMO demand for GN IIs.
We also noticed two rather large trades in the futures market that are indicative of a mortgage investor hedging against a possible rates sell off (lower prices). Does that make you nervous? Eh...updating hedge ratios is not a big deal, but the size of the trades combined with a few other factors make us more skeptical of the rates rally that has transpired over the past few days.
The speed, strength, and extent to which benchmark yields have fallen, plus the considerations one must account for regarding quarter end balance sheet window dressing (get those AAA assets), plus month end index extensions (BULL FLATTENER= duration grab), plus recent dollar jawboning, etc etc supportive events etc....all raise a skeptical eye brow as to the possibilities of a meaningful breakout from the RANGE.
Our instincts tell us to take profits before they are gone. Our previous experiences tell us that the best we can hope for is holding near the MORTGAGE RATE FRIENDLY side of the rates range. 3.27% on the 10yr hasnt been broken since May. How can we ignore the RANGE that has moderated mortgage rates all summer? We could speculate that a stock sell off led flight to safety into TSYs would help mortgage rates move lower...but havent we been wishing for that since August?
IF the rally continues and rates do indeed break the summer range...it would imply a greater shift in BIG PICTURE market sentiment was occurring. Is the fundamental focus shifting back to the consumer? More weak jobs data?
We've been here before.....and for some reason or another the range always kept rallies and selloffs in check. Makes it hard to go against that RANGE...
So, while we think its safe to float a few loans, we still favor locking up a good portion of your pipeline while pricing is at its most aggressive levels since spring.Rates could get better...but you have more to lose than to gain.
Make sense? It's really the core concept of GUTFLOP.