MBS OPEN: Rates Cheaper to Start the Session

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Good Morning. Happy Hump Day. A moment of silence for the lives lost in Haiti last night........

Very sad to see a struggling country's problems get worse because of a natural disaster.

Recap of Yesterday...

  • MBA Reduces Origination Outlook Again. Home Prices Expected to Stabilize in Spring. READ MORE
  • HUD Investigations Heat Up. Subpoenas Served at 15 Shops. READ MORE
  • Are Indirect Bidders Losing Interest in US Debt? READ MORE
  • MG says first layer of rally resistance taken out. 3.71 is new key level of resistance in 10s. READ MORE
  • Did you know that Govie loan programs are juiced more than conventional loans? I baked in a full point to my govie's when I generated pricing. READ MORE
  • Chrisman keeps making me laugh out loud. Can brokers charge origination on VA loans or not? READ MORE

The secondary mortgage market enjoyed a "facemelter" yesterday, however the resulting effect on the primary mortgage market (rate sheets) was not as much a facemelter because reprices for the better were sparse at best. We did see some mid-size lenders passing along a few extra bps, but improved rebate was not widespread. The FN 4.0 ended the day +0-21 at 97-17 yielding 4.235%. The FN4.5 went out +0-17 at 100-17 yielding 4.452%. The secondary market current coupon was 4.441%. The CC yield was 72 basis points higher than the 10 year Treasury note and 62 basis points over the 10 year swap rate.

Volume in the MBS market was below average according to flows in electronic trading platforms. On an absolute (price change) and relative basis (yields compared to benchmarks) MBS didn't do so bad thanks to light loan supply from originators (who hedge their pipeline using TBA MBS) and the constant support of the Federal Reserve.

Rate sheet influential 10 year TSY notes BULL FLATTENED in an "outside day". Outside as in 10yr notes broke out of the recent 3.75-3.84 range. Prior to yesterday's rally we watched the trading range narrow (consolidation), then short positions were covered and new positions were added.  This modest increase in volume is relatively encouraging of an extension of the recent rally.

The yield curve can flatten one of two ways: Bear or Bull

A bull flattener is when yields in the long end of the curve are falling faster than yields in the front end of the yield curve. For instance if 10yr TSY note  yields are falling faster than 2yr TSY notes, then the spread between the two TSY coupons would be tightening...or more simply put there are less yield basis points separating the 2yr note and 10yr note.

A bear flattener is when yields in the short end of the yield curve are rising faster than yields in the long end of the yield curve. For instance if the 2yr note yield was rising faster than the 10yr note yield. Although  yields are rising, because yields in the front end are rising faster than yields in the long end, the yield spread between the 2yr and 10yr would be getting smaller, or tightening.

TRADER JARGON: when we expect the curve to flatten we say SELL THE CURVE aka sell short term futures (2s) and buy long term futures (10s).  I use Eurodollar futures depending on the market's sentiment about the Fed's monetary policy stance.

Check out the bull flattener in 2s/10s...

So Far Today...

  • Asian equity markets took one on the chin overnight. SHANGHAI:- 3.09%, HANG SENG -2.59%, TOPIX 1.06%, KOSPI -1.60%, NIKKEI -1.32%.
  • Europe is mixed at mid-day. CAC: +0.1%, DAX +.45%,  FTSE -0.19%
  • Mortgage Applications Rebound After Holiday Season. READ MORE
  • Fed's Plosser says he doesn't expect MBS spreads to gap out when Fed exits. SEES NO REASON TO EXTEND THE MBS PURCHASE PROGRAM. 
  • Fitch says $47 billion in Prime/Alt-A Interest Only loans will recast in 2010. That means PAYMENT SHOCK! READ MORE

Treasuries have given back a portion of yesterdays gains this morning. Yields are slightly higher and the yield curve is slightly steeper to start the NY session. (This means you would BUY THE CURVE aka buy short dated TSY futures and sell longer dated TSYs futures.)

10s are currently -0-08 at 96-30 yielding 3.75%....

After some heavy overnight buying from Asian accounts, rate sheet influential MBS coupon prices are cheaper at the US open.  The FN 4.0 is -0-05 at 97-12 yielding 4.249% and the FN 4.5 is -0-02 at 100-14 yielding 4.462%. The secondary market current coupon is 4.451%. The CC yield is 70 basis points over the 10yr TSY yield and 60bps over the 10yr swap rate. MBS yield spreads are tighter (normal into a downtrade).

Yesterday' s 3 year note auction was about average...woohooo. If you didnt pick up on the sarcasm, I was being sarcastic. This is because 3 year notes are not 10 year notes. To be clear, the  market's month long bias to sell "rate sheet influential" TSY debt was not really tested by yesterday's 3 year note auction. That test will occur today when $21 billion 10s go off in the lunch hour. More on that to come in MBS MORNING.

Looking further ahead, while we are hopeful that 10s and "rate sheet influential" MBS have some "relief rally" gas left in the tank, we are not feeling too optimistic of a stable return to the days of 4.50 paying at par on rate sheets.

Plain and Simple: a short term rates rally is possible following the completion of this week's auction cycle. We could see 10s test 3.50% again and the FN 4.5 move back over 101-00....but don't expect it to last long. This means you should be looking to squeeze out any borderline fencesitters and float boaters ASAP. Set a rate sheet rebate target...when/if that target is hit, don't wait a little longer for more rebate....take profits off the table and move on....and for heaven's sake YOU BETTER BE WORKING ON A STRATEGY TO GET SOME PURCHASE BUSINESS. 

NEXT EVENT: $21 BILLION 10 YEAR NOTES AT 1PM