MBS AFTERNOON: Current Coupon Sees Modest Recovery

While last Friday's MBS valuation weakness extended all the way into the first half of today's trading session...buyers finally emerged this afternoon to cover shorts, helping yield spreads tighten up a few bps and providing a small correction heading into the release of Non-Farm Payroll data on Friday.

The FN 4.0 is -0-04 at 99-22 yielding 4.038% and the FN 4.5 is -0-04 at 102-02 yielding 4.248%. The secondary market current coupon yield is 4.046%. The CC yield is 73bps above the 10yr TSY yield and 62bps above the 10yr swap rate.

Unfortunately, the slight correction we witnessed this afternoon is not as noticeable to the naked eye, especially with our benchmark directional guidance givers heading in the wrong direction (up) and  "rate sheet influential" MBS prices testing six day lows.

The above "small correction" in MBS relative values (yield spreads) is a function of day trading....we take nothing new from this observation, it is purely that, an observation. Actually..this is the same old story we've talked about all year in the agency MBS market:

The Fed remains a constant source of liquidity when trade flows are in need of supportive balancing (buyers vs. sellers), hedge funds and money managers continue to go back and forth between "up in coupon" and "down in coupon" as the shape of the yield curve shifts and originator loan supply comes and go's, servicers add duration when necessary, but remain skeptical of the market's bias to push yields lower (dont want to add too much duration = extension risk/interest rate risk), real money accounts, like banks, are not fans of these high dollar prices...while they aren't sitting it out, they are also not a great source of liquidity either. With exception of hesitant real money participation, agency MBS  demand side support remains strong as we head into year end (super rich valuations or not).

Then there's mortgage rates, the above doesnt mean much in the eyes of rebate watchers does it?

Rate sheets have been progressively less aggressive since maxing out late last week. When trying to decide whether or not to wait it out for lower rates or take what you have in front of you...considering mortgage rates are still FANTASTIC, we continue to state that, regardless of rallying price action in the secondary market (read that as an IF), lenders are not likely to push rates too far past 4.50%. Take what you got and go shake the bushes for new business!

The two week lock bias remains in place heading into NFP on Friday.