MBS CLOSE: Recapping the Day and Looking Ahead to Tomorrow

By: •

There's something about writing the MBS CLOSE that just bothers me.

I can't put my finger on one specific reason why I loathe the evening time spot, I just do! Perhaps I prefer not to write the MBS CLOSE because its somewhat of a recap of things we've already written or discussed.

There is also the issue with MBS CLOSE "performance pressure". MG and I refer to it this mental barrier as "WALKOFF PRESSURE". It s a mysterious force that pushes us to expand our own personal knowledge base in an effort to expand your's. When one of us does perform a "WALKOFF" ...its usually a pretty big deal. More or less those posts set the tone for weeks to come.

Although I know I can perform under pressure... :-D.... I just dont feel like writing any NEW content today. Im tired. Fortunately the "issue" I have with re-writing already written content can be used to my advantage.

I think I can recap the day using all the content already posted on MND today.

Let's see.

Stocks fell early in the day...

From The Day Ahead...

Equity futures were sharply lower this morning after Bank of America reported it had lost $5.2 billion in the fourth quarter. The Republican upset in the Massachusetts election also contributed to equity investor anxiety as the Democrats no longer have 60 seats in the Senate, which makes the future of healthcare reform more uncertain.

90 minutes before the bell, the benchmark S&P 500 was down 4.40 points to 1,141.30 and futures on the Dow are off 33 points to 10,637. Weak commodities confirm that that risk is off the table. WTI Crude oil was down $1.10 to $77.92 per barrel and Spot Gold was $10.00 lower to $1,130.00.
   
From Around the Web...

THE BOND MARKET OPENED IN THE GREEN...

From MBS OPEN...

So why the overnight bond market rally?  A few reasons, but one stands out, just like it did yesterday.  From MBS MORNING...." it should be noted that the bond market might like to have a few more Republicans on the Hill to filibuster heated debates. From a BIG PICTURE point of view, republicans generally favor less government spending...the bond market would consider this a sign of less government borrowing in the future and therefore less TSY supply and firmer yields across the curve"

PLUS

  • China ordered some banks to decrease lending (yeah, they can do that...)
  • BOE (bank of England) meeting minutes reveal unanimity on decision to keep policy steady.  Allowing US to respond confidently when our mom asks us "if all our friends are doing it..." questions...
  • Japan PM saying he wants to stay away from yield spikes in their government's debt when creating spending plans to support their economy.

THEN WE GOT MIXED ECONOMIC DATA...

MORTGAGE APPLICATIONS: Both the refinance index and purchase index improved off of ANEMIC levels of activity last week (sorry...not trying to be a frustrating fred or debbie downer...it is what it is).  I usually try to look a little deeper into the loan origination process for the underlying logic behind fluctuations in loan app demand, such as originator commission schedules or strategies to reduce closing table costs for the borrower, but this one is probably not too complex. After moving higher most of December into January,  mortgage rates have recovered some lost ground over the past week. It would make sense, given the outlook for higher rates in the near future, that last minute float boat borrowers would be looking to "get off the fence" ASAP....especially when a few IO ARMS about to go index +margin.

HOUSING STARTS DECLINE, PERMITS RISE. BUILDERS LEADING HOME PRICES ACROSS TIGHTROPE: Home builders will be looking to get out in front of future housing demand. In the months to come, if forward looking builder sentiment improves and losses in the labor market continue to moderate , we will likely see gains in housing starts and building permits. If builders are too optimistic, it concerns me they may end up adding unwanted supply of new homes to the still overcrowded marketplace. This would put downward pressure on home prices and hurt the overall economic outlook.

INFLATION LEVELS WERE MOSTLY STABLE AT PRODUCER LEVELS: The release indicated overall prices paid by producers increased 0.2%, which was slightly above the consensus of no change.  When you strip out volatile food and energy, the core rate, prices paid by producers were unchanged, beating expectations of a 0.1% increase.   Another report indicating inflation is not a concern today, which should allow the Fed to maintain their current accommodative stance regarding our nation’s monetary policy.

FOLLOWED BY FHA POLICY UPDATES FROM HUD...

FHA Increases Upfront MIP Fee; Raises Credit Score Requirement; Reduces Seller Concessions:

  1. Mortgage insurance premium (MIP) will be increased to build up capital reserves and bring back private lending
  2. Update the combination of FICO scores and down payments for new borrowers.
  3. Reduce allowable seller concessions from 6% to 3%
  4. Increase enforcement on FHA lenders

MBS PRICES CONTINUED TO TICK HIGHER...

MBS MORNING: NEAR BEST LEVELS OF THE DAY: The 4.5 is up 8 ticks at 100-29 (what's the word for 101nertia?).  Buying is clearly favoring "down in coupon" as the 4.0 is up 9 ticks versus the 6.0 at just 2 ticks better.   As is the norm in a rally...MBS are being outperformed by big brother benchmarks...  The 10yr is up 12 ticks, dropping the yield to a range stretching 3.65.  Both marks are the best of the year.  MBS SECONDARY MARKET CURRENT COUPON: 4.391%. Yield Spreads: +74.5/10 yr TSY, +64/10yr swap, still quite tight.   The yield curve itself is much flatter on the day with 10's down 4.7bps in yield vs. 2's at only 1.6bps improved.  That drops the curve to 278.6 bps with no further significant data on the day. With little data left today, we're rapidly approaching decision time for overnight floating.  Keep an eye on reprices for the better or simply strong rate sheets right out of the gate so you're in the fastest position to assess the risks of the overnight float going into tomorrow's heavier data calendar and the theoretically important auction announcements.

THEN VIC FLIPPED FROM FLOAT TO LOCK...

Mortgage Rates Move Lower. Favor Locking Over Floating: If you have been floating your rate for some time, you have picked up noticeable gains over the course of the week. With that in mind, there is nothing wrong with taking your chips off the table by locking your loan now.  If you have been waiting to pull the trigger for mortgage rates to decline back to the low’s of last year, I would suggest that you stop waiting...LOCK NOW.  While I am not totally against floating into tomorrow, I think recent gains justify some profit taking.

MBS PRICES STARTED TO LOSE STEAM INTO THE CLOSE, BUT NOTHING UNEXPECTED...

From MBS AFTERNOON:AM PRICE LEVELS RETURN FOR ENCORE:

We discussed 100-24 in MBS 4.5's this AM in the following context.

"This is a classic example of inflection and/or pivot point.  Technically speaking, we talk time to time about "one man's floor being another man's ceiling."  The suggestion is that if a price level was "tested" and proved resistant to breakthrough, that once that level was finally broken, it's more likely to have ongoing technical significance and resistance to breakthrough coming from the other direction, aka "SUPPORT."

And prices certainly had that chance to approach from the other direction as the 4.5 fell about 5 ticks from it's highs of the day.  But 100-24 stepped up and indeed filled that support role.  Remember, these pivot points aren't hard and fast rules, but amount to an "odds increase" to a minor extent as well as an indication that a previous trend is shifting.  But the odds are in our favor today apparently, and the current trend of strength remains intact after the most serious test of 100-24 support seen since this AM.

WHICH WAS FOLLOWED BY AN MG GUTFLOP ADVISORY...

Now, we're getting to that point where decisions must be made regarding your overnight positions.  Just as pertinent as the 100-24 support is the 100-30 resistance overhead that's been visited three times so far today.  It's likely that this range will be broken tomorrow, even if the reasons have more to do with it's narrowness than expected organic price cues.  That said, tomorrow is our biggest day of data this week.  Prices will likely respond to a certain extent to the AM data.  And then again surrounding the auction announcements.

Simply put, there's always going to be a risk to the overnight float, and it's more a matter of hedge ratio and your personal risk tolerances.  Hence, the Gut-Flop.  Just be aware of the dual nature of tomorrows significant events.  One round in the AM.  Another round later in the AM at 1100AM.  Later still, there's the less volatility-inspiring fed balance sheet and money supply at 430pm.  To whatever extent the AM data leaves you in floating shape, there's a chance you can ride that wave and lock as necessary if the reaction to auction announcements proves to be negative.  Again though, that is dependent on prices holding current levels through AM data.  Response to that data may be more muted than it otherwise would be in the absence of auctions.

WHICH LEADS ME TO PRESENT TIME....

The "rate sheet influential" FN 4.0 ended the trading session +0-05 at 97-26 yielding 4.209% and the FN 4.5 went out the door +0-05 at 100-25 yielding 4.425%. The secondary market current coupon was 4.403%. The current coupon yield was 75 basis points over the 10 year Treasury note yield and 64 basis points over the 10 year swap rate. The "rate sheet influential" mortgage-backed securities rally lagged/underperformed the Treasury rally today.

Regardless of the late day fall from the price highs, mortgage rates were able to hold onto today's rebate improvements.

While we remain confident enough to allow floatboaters to stay out to sea, we do think it is necessary to call attention to a  mini-CROSSROADS event  in the rates market.

New 2yr/5yr/7yr auction supply terms will be released by Treasury at 11am tomorrow morning. This will be the market's first chance to stress test the recent "relief rally".  In the past six months, the bond market has tended to position itself for "auction concessions" early on in the announcement process...meaning before or soon after the supply terms announcement. While we are looking for the market to poke and prode at better levels, we feel its necessary to manage a tight ship over the next few days.

Plain and Simple: although the bond market relief rally is strong on charts and backed by fundamentals (in our opinion)...its still a trader's world, and we're still living in it. Because it has been proven in the past, when TSY is about to issue more debt,  that the market tends to ignore fundamentals in favor of supply/demand technicals. If you have been floating freely and are feeling great about it...you need to respect this perspective and lock in some pipeline profits. Other than that...float through these waters very cautiously, register your loans to allow for quick commitment, and do this on a day by day basis.

We're about to test the strength of our so called "relief rally".

Here is the calendar for tomorrow: