MBS AFTERNOON: Like It Never Happened...
In breaking news, it has been determined that today's NFP report was all an elaborate hoax that was never intended to have any effect on the markets beyond today. Or at least that's how the headline could read at the top of the list of "things that would not surprise us." What do I mean?
Nothing more than this: After all the sturm and drang of AM volatility, the market continues in the exact same direction suggested by it's previous trends, which would have been for a reversal at 3.56 (yesterday) and a continuation of the rally into today depositing us somewhere in the neighborhood of 3.5... For MBS, just an extension of previous trends as well (yesterday we warned against perceiving the rally in MBS as an indication of reversing downtrends from the beginning of the week, but given the broader market's reaction to NFP, that's in fact basically what happened...)
Put to the picture, you can see that although we endure an infinitely expected period of extreme volatility in the wake of the NFP print, it might as well not even have happened given the levels at which the day looks to for its 3pm marks...
And in tsys:
So has anything really changed? If it has, no one would really know about it... And stocks agree with the dow and S&P both within 1/10th of 1 per cent of unchanged...
The concluding sentiment here raises an opportunity to discuss locking and floating concepts from both Vic's consumer blog and my morning commentary. someone asked in a blog comment today why vic said float and I said lock... Oh... If only it were that simple, one of us could just be wrong and the other right, and we could move on...
Vic gave more of a float impression. I was more lock-biased... But the zen-like balance afforded you by GUTFLOP suggests a hidden harmony...
Vic said: "Because the Employment report was friendly to the fixed income sector, I am switching my outlook from lock to float. However, because we are seeing better rates this morning, there is nothing wrong with locking today to take advantage of overnight and morning improvements. "
I said : if you have the good prices passed on in rate sheets, it's time to cash in. Traders probably will regardless... So perhaps this is not an outright "lock alert," but it's a fairly strong suggestion for all those who have seen the eigtht to a three eighths improvement from yesterday afternoon's sheets...
I have to apologize that I wasn't nearly as clear as Vic. It's a very important distinction to see the part about "from yesterday afternoon's rate sheets.." And I think "cash in" could have used more clarity. I always want you to approach locking and floating from a gutflop perspective... So to me, "cash in" is not the opposite of floating, but rather an adjustment of your hedge ratio to become more lock biased as two factors are satisfied:
a) MBS move towards all time highs
b) lenders give you pricing that's an eighth to three eighths better than the best pricing you had yesterday.
And here at 10 ticks up on the day, we're right in the middle of that range. The moral of the story is the balanced approach that vic alludes to in saying "nothing wrong with locking today to take advantage of improvements." Indeed there is not, and for my part, I wouldn't suggest locking unless you are indeed improved over yesterday's best sheets by the aforementioned margins. But when I'm talking to you on the pro blog, the default assumption is maximizing long term profitability and income stability. So it goes right back to the 2 bullets above... To whatever extent your rate sheets are better than before, AND prices are getting closer and closer to highs that they probably won't break for a long long time, it makes all kinds of sense to ratchet up the 'ol hedge ratio.
In light of "NFP never happening," which is a conclusion I came to only in the last few hours... I'd be a little less inclined to increase the hedge ratio than I was this morning. But that is a much smaller consideration than the question of how much of the gains are you seeing... We'll add to the gutflop someday to talk more about this, but you really HAVE to be a student of the TIMES that your lenders rate sheets come out, when they reprice, whether they reprice more in the morning or afternoon, whether it happens more with particular reports than others, what treasuries are doing when it happens, how much rebate was given at a certain rate over the last few months on any given rate sheet, and so on and so on... If you are that diligent of a student of lender pricing habits, you'll be able to know without doubt something like: "last time MBS were at 101-08 the YSP at 4.75 was ____, but today it's _____. I got a reprice at ____pm yesterday after beginning the day at ____ on the 4.75. MBS are ____ ticks up since the am and ____ ticks up since the reprice, so _____ bank should be at _____ all things being equal, so I will _____ this loan and _____ that one....
No, that's not a "one train leaves from..." problem. It's the reality of applying individual lender habits to the broader MBS market...