MBS AFTERNOON: Weaker Into Close, But Support Is In
Striking from the shadows, and gone before we even knew he was here, it's the MBS Ninja with your afternoon MBS delight: (mg says: I inserted my notes here and there where I thought they might be of benefit. Let me know if it's education overkill, warm porridge, or "more please!")
Mortgage-backed trading is suffering from a bit of the mid-winter blahs as supply is not equal to demand and demand "aint" quite itself either. (MG Says: Ninja referring to supply of MBS--Lenders selling their pooled loans through to TBA market for instance--and demand refers to accounts buying MBS, such as the Fed, servicers, money managers, etc..) This is added to a deep freeze currently enveloping accounts who prefer to remain on the sidelines until more clarity is gained and or garnered by the Federal Reserve MBS Agency purchase program ($1.173 billion consumed to date-$77.07 billion left in the weeks remaining 'til the end of Q110). Prepay speeds have steered those actually involved in rate-influential secondary trading farther up the coupon stack (MG Says: recent monthly report out on prepay speeds--aka "how quickly are certain MBS pools paying off in terms of time and $$. Slower the speed, the more investors might be enticed to offer something higher than the principle amount for a pool of loans in order to collect more interest over time) toward 6%s as premium handle (101-00 or higher price) coupons have few callable obstacles ("call risk" - variable of MBS valuation referring to borrower's right to pay off, refi, move, etc...) to ownership of late.
The days ahead are filled with more challenging treasury auctions that could serve to back up rates (make them go higher), thereby pushing MBS coupons and rates sheets up as well. Within the MBS secondary trading circle, more apathy and price exaggerations are more prone to happen as end user accounts (Real money in trading jargon) prefer to sit and wait-at least until the Fed weekly recap of purchases comes out again this Thursday afternoon at 3pm EST-look for a bigger selloff in rates if the program shows under $10 billion as the average weekly consumption has to start veering lower to $9.6 billion in the 8 weeks remaining until the Fed pulls the plug and the market is on its own with respect to "free" trading markets.
As for prices at the moment, 4.5's are down 4 ticks at 101-05 after putting in a noticeable show of support at 101-01. Tsy's got their support from the 3.65 level and currently trade just under that, but coming from yesterday's yield under 3.6%, the effects of a pre-auction concession are noticeable.
