MBS ALERT: POSSIBLE REPRICES FOR THE BETTER AS MBS RALLY

By: Matthew Graham

Now up 2 ticks to 100-14, MBS are at their best levels of the day.  Additionally, the yield curve continues to flatten after steepening on yesterday's FOMC minutes, which indicated a "short end friendly" lack of inflation concern and extended outlook for low short term rates.  In addition to those fundamental reasons for steepening, such things more often accompany price losses anyway.

Recalling then that shorter end of the yield curve coincides with higher coupon portions of the MBS stack, it wasn't surprising to see an "up in coupon" day with 6's performing much better than 4's for instance.

 5.0's are seeing the most love today from servicers and hedge fund types as this AM provided what was perceived as a good entry point on the weekly lows.   Against the backdrop of noticeably flatter yield curve, one would expect an evenly duration-matched MBS stack to noticeably favor 4.0's and 4.5's.  It says something, then, that 6.0's are up in relatively similar amounts to 4.0's in terms of outright price, and that something would be further spread tightening in premiums (higher coupons) ahead of tonight's prepayment speed report.  This is also in response to that higher coupon section of the stack underperforming 4.0's and 4.5's last week.

As AQ mentioned this AM, and yesterday, and the day before, and the day before, 100-14 continues to be "pivotal."  In other words, it's been a good pivot/inflection point.  Any time a MBS  trade about half a point over par, pivot points have a good chance of emerging.  As we are approaching those levels from lower prices, 100-14 is a good candidate.

Nonetheless, prices are as high as they've been all day and to whatever extent things remain near 100-14, there's a reasonable chance of some small reprices for the better given the nasty lows this AM.