MBS MORNING: Approaching Record Prices. Reprices for Better Possible

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Its been a busy morning, there is much to discuss...

First and Foremost...

The FN 4.5 is trading +0-11 at 101-19 yielding 4.3043%.  The FN 4.0 is +0-15 at 99-15 yielding 4.0586%. The secondary market current coupon is 4.1446% and moving lower....dont shorten your hedge ratios traders,we are in step with the 10yr.

Thanks to servicer buying, Current Coupon yield spreads are slightly tighter. Here is a breakdown of relative value using our model (still using 5 CPR for FN 4.5s)

CC vs 10yr TSY: +92

CC vs. 5yr TSY: +192

CC vs. 10yr Swap: +78

Rate sheet rebates are better today....pricing hasnt been this aggressive since late spring.

Here is the FN 4.5 two day chart...

Meanwhile,the FN 5.0 is trading at all time price highs. The FN 4.5 needs to move into the 102 handle before we can call Guinness

10AM Data was mixed...

Pending Home Sales: +6.4% in August vs. +3.2% in July. +12.4% Since August 2008. READ MND STORY

Construction Spending: +0.8% in August vs. -1.1% in July (revised for worse from -0.2%) READ MND STORY

ISM Manufacturing: 52.6 in September vs. 52.9 in August READ MND STORY

ISM Prices Paid: 63.5 vs. prior 65.0

Yesterday, a weak read on manufacturing conditions in the Midwest was not greeted warmly by equity traders. Today, stocks were trading lower when 10AM data hit wires....the results were not strong enough to warrant a reversal of selling sentiment, and downward pressure mounted. In the Treasury market, rates went sideways before the release, then rallied afterwards as stocks sold.

Ben Bernanke has been giving testimony before Barney Frank and the rest of the House Financial Services Committee. The hearing is currently at recess. From my Reuters news feed, here are some important comments...

BERNANKE SAYS:

  • DOESN'T WANT TO SECOND-GUESS FDIC'S DECISION TO HAVE BANKS PRE-PAY INDUSTY ASSESSMENTS. BANKS ESSENTIALLY MAKING A LOAN TO FDIC
  • THERE ARE SOME CIRCUMSTANCES WHERE FINANCIAL PRODUCTS ARE TOO COMPLEX, OUTWEIGH BENEFITS TO CONSUMERS
  • FED VIEWS EXECUTIVE COMPENSATION AS A SAFETY AND SOUNDNESS ISSUE; PAY SHOULD NOT GIVE INCENTIVES FOR SHORT-TERM RISK-TAKING
  • SHOULD BE APPROPRIATE LINKS BETWEEN PERFORMANCE AND PAY IN EXECUTIVE COMPENSATION
  • FED IS LOOKING TO INTERNATIONAL STANDARDS SET BY FSB IN SETTING ITS GUIDELINES FOR EXECUTIVE PAY
  • NO IMMEDIATE RISK TO DOLLAR LOSING ITS STATUS AS GLOBAL RESERVE CURRENCY
  • U.S MUST GET ITS FISCAL HOUSE IN ORDER; OTHERWISE IT COULD POSE RISK TO DOLLAR
  • FRANK SAYS MAKES SENSE TO BAN FINANCIAL PRODUCTS THAT COULD POSE RISK TO LARGER FINANCIAL SYSTEM
  • WOULD WEAKEN DOLLAR IF WORLD WENT TO INTERNATIONAL RESERVE CURRENCY, DOESN'T SEE THIS AS NEAR TERM RISK
  • FED CONFIDENT IT CAN SUPPORT ECONOMY WITHOUT INDUCING INFLATION
  • FED HAS TOOLS AND POLITICAL WILL TO ACHIEVE PRICE STABILITY
  • THIS YEAR AND NEXT YEAR, BUDGET BALANCE NOT AT ALL FEASIBLE, IMPORTANT TO HAVE CREDIBLE PLAN TO REDUCE DEFICIT
  • IF RESOLUTION AUTHORITY ENACTED, FED MIGHT NOT NEED EMERGENCY POWERS TO RESCUE FAILING FIRMS
  • COULD CREATE STRONGER CONSUMER ADVISORY COUNCIL TO ADVISE FED ON CONSUMER PROTECTION
  • FED WILLING TO STRENGTH INSTITUTIONAL FACTORS TO PROVIDE STRONGER CONSUMER PROTECTION

Most of what Ben has said didnt move money, however at 1053AM Bernanke made a comments regarding RISKS TO THE DOLLAR (see above).

When this statement was made the dollar index rallied and equity markets sold off a little more..

Here is a two day look at the S&P...

Stocks are not just wandering aimlessly though, there is technical significance to each leg of today's sell off. We have been working off the most recent bullish trend cycle which started on September 3. Below is a chart with Fibonacci retracement levels overlaid. The 38% retracement, which has served as a  solid support level since stocks began to sell in late September, was broken this morning. Selling after Bernanke's dollar comments then pushed the S&P down to the 50% retracement of the September rally.

See why we have been paying so much attention to trading technicals?

At 11AM the Treasury announced the terms of next week's coupon supply. $78bn will be auctioned next week, this issuance amount was in line with expectations. 

Here is the breakdown:

  • MONDAY: $7bn 10yr TIPS (reopening)
  • TUESDAY: $39bn 3yr notes  ($1bn more than Sept.8 auction)
  • WEDNESDAY:$20bn 10yr notes (reopening)
  • THURSDAY: $12bn 30yr bonds (reopening)

This cycle of auctions will raise almost $64bn in new cash when the issues settle on Thursday, October 15.

Yield Curve
2s/5s: 4bps FLATTER at 133bps
2s/10s: 2bps FLATTER at 233bps
2s/30s: 1bp FLATTER at 309bps
5s/10s: 1bps STEEPER at 100bps
5s/30s: 3bps STEEPER at 176bps
10s/30s: 2bp STEEPER at 76bps

MBS trading flows have not been as busy as one might expect as near record high prices have pushed many mortgage investors to the sidelines. Servicers are however adding duration to their portfolios via purchases of 4.5 coupons while Originators have sold about $1 billion in Fannie paper and $1bn in GN paper.

Plain and Simple: MBS PRICES ARE GETTING TOO EXPENSIVE!!!

Reprices for the better are a possibility....

MBS, TSY, LIBOR QUOTES

ARE YOU ON THE NAMB WEBINAR? What are we missing?