MBS LUNCH: Supportive Week Living Up To Its Name

Ah... the eternal dichotomy between what's important to MBS traders versus what's important to the mortgage origination crowd.  AQ and I talked last week about the true nature of "supportive week" in that the benefit is usually reserved for the SPREAD situation (MBS yields vs. Tsy yields).  And indeed, spreads are quite a bit tighter today.  So in that sense, "supportive week" is delivering on its promise so far.

In MBS Lunch last week, AQ said the following with respect to SUPPORTIVE WEEK:

...that statement may have been a bit misleading.

Do not read that as: "AQ expects MBS prices to improve next week".

Read as: "AQ expects MBS to outperform TSYs next week".

To the trader, MBS PRICES mean very little in and of themselves.  After all, what does it matter if prices were so low that rates went to 6% if similar duration treasury rates were up to say, 10%?  A mortgage originator might lament such news, but the trader would be aghast at the insanely overvaluation.  In other words, treasuries would be such a good deal at that point (10% risk free vs. 6% "mostly" risk free, right?), who would even buy MBS? 

And though I wouldn't worry about MBS spreads reversing 470 bps in the other direction in anyone's lifetime, ever, it raises a valid point.  What is the relationship between MBS and Tsy's telling us about our current lock/float positions?  Consider that the 10yr is down 16 ticks at the moment whereas MBS 4's and 4.5's are down only 4 and 3 ticks respectively

Long story short, if we felt rather like locking before, such movements in the tsy market where MBS hold fairly steady by comparison only serve to reinforce our default defensiveness.  MBS spreads, the not necessarily a zero sum game, must eventually move in a SIMILAR direction to treasuries.  With that in mind combined with the looming fed exit that's widely seen leading to spread widening (opposite of what we're seeing today), any tightening MBS can put on tsy's, at the very least REINFORCES a lock bias, if not outright suggesting it. 

You may have noticed a bit of the stock lever at play in the chart above as well?  A factor of light data calendar ahead of more important events this week no doubt, but in terms of pure prices on the S&P index, the importance of 1087 should be noted.  This was the lower limit of the Epic Range Bind Of Late 2009, and that same value seems to be providing some overhead resistance today.  Just something to watch as the week progresses...