MBS CLOSE: Going Out Near The Highs Of The Day

By: Matthew Graham •
  • MBS 4.5's end 4 ticks higher at 101-07
  • 10y tsy 2 ticks lower, good for about a bp higher in yield at 3.620
  • All 3 major stock indexes within 0.1% of unchanged after morning and mid day gains
  • As stocks sold, tsy's rallied 6 ticks and MBS rallied 4.
  • Classic "tsy's a bit down, MBS a bit up" kinda day, previously discussed HERE...
  • More data tomorrow and a day closer to NFP
  • Time to lock?

The afternoon ended as it began for MBS: rallying into consolidation.  With the exception of the early morning movements in capitulation to treasuries, stocks, and data, the only real volatile movements for MBS were of the upward variety.  And in somewhat of a departure from the norm, those gains merely consolidated and kept on going only to consolidate again in the last few hours near the highs of the day.

Although it's "neat" to see (yet again) plenty of cocktail party conversation material in the 10yr note's penchant to wax inflectional around it's current par value, the more interesting story today is the headiness of pure price in MBS.  It's almost as if some sort of Class A settlement (aka "roll") were soon to be upon us, and the soon-to-be-front-month April coupon  was at a much more believable 100-27.  But these many days before settlement, this is the highest we've seen MBS this year. 

As the chart suggests, the bigger issue we face deals with the broader rates market and indeed the market in general as it responds to NFP on Friday.  Tomorrow is kind of a wild card.  You might win, you might lose, but if lenders are priced remotely close to reality after today's reprices for the better, that card might be too for any deals you're going to lock ahead of NFP anyway.  Of some solace is the fact that the market CONTINUES to go more sideways than directional from a day over day standpoint. 

To add a definitive recap to previously discussed reasons that MBS outperformed tsy's today, here's the Ninja in his own words on "higher coupon scary... lower coupon not":

"Mortgages again were more tenuous on the upper stack today and that's good news for rate sensitive MBS and I'll relate to you why;

The inner workings of TBA trades (those not settling anytime in the near future) are usually offset by doing the opposite with similar trades also slated for future settlement. What does all this have to do with rate-sensitive secondary and hence primary rates you may ask (go ahead, ask)?  In short, the troubles brought on future TBA pools of 5.5% thru 7% MBS will be best avoided by heading lower in coupon and staying current and more sound in underwriting with market rate securitized mortgage-backeds. The pain felt as 6.5%s were ramped up to almost a near wipeout prepay speeds (100 CPR) is being soothed and otherwise avoided along 4.5%s-the main "current coupon" for all the continental U.S. as worked for by the Federal Reserve-New York chapter.

Until the secondary market is cleaned up of 120+ day delinquency loans and ultimately pools, the market will more likely focus its buying in lower and more credit worthy 4.5%s where are the timely and credit worthy payers park their mortgage borrowings."