Addressing Analyst Concerns For "Material" MBS Corrections
I've gotten quite a few emails from panicked pipeline managers and loan writers regarding Meredith Whitney's bearish feelings on the Fed's exit from the MBS market and the general health of housing. If you missed it... THIS STORY is a decent recap of the CNBC interview.
If you are asking, WHO IS MEREDITH WHITNEY?....she is an influential Wall Street banking analyst and independent investment researcher. She was notoriously bearish about the banking system before the worst days of the current financial crisis...and got a lot of attention because of it. Her guidance, outlook, and opinion have the ability to move markets....
This morning, Meredith correctly called attention to the fact that the macroeconomic recovery is largely dependent on the health of housing. Whitney is concerned housing will take another dip as shadow inventory has distorted equilibrium supply and demand...which I cannot argue with but happen to think it is in most bank's best interests to offer REO in a slow and steady manner.
Then she moved onto the Fed's exit from the agency MBS market...this is where alarm bells went off for some mortgage market watchers.
Whitney said, "The asset classes of MBS and Treasury's are priced for a material correction in my opinion....the only buyers of agency MBS are the Fed and banks so you see how precarious that market is....If the Fed pulls back, that's a really big deal... because there's no substitute buyer."
Plain and Simple: Whitney believes the Federal Reserve and bank are the only source of investor demand in the "rate sheet influential" agency MBS market. Based on that assumption she thinks current coupon MBS valuations will cheapen up "materially" relative to Treasuries (yield spreads will widen).
She did not actually distinguish between the two sides of the MBS coupon stack, "rate sheet influential" current coupon 4.5s vs. credit impaired super premium 6.0s, but I assume she knows what she is talking about so I gave her the benefit of the doubt in my Plain and Simple.
I cannot disagree with Meredith on most of her statements, however I am not exactly sure how much she means when using the term "material". I expect mortgage rates will rise relative to Treasury yields...but not as much as many expect. Structural weakness in housing demand will continue to reduce the amount of new MBS supply that the secondary market needs to support. This is a message that is now starting to be broadcast by the mainstream media. I posted a very clear explanation as to why we do not think rates will skyrocket when the Fed exits the TBA MBS market. I know its a bit long, but I believe it covers all necessary bases and provides a firm foundation to formulate your own opinion--- ITS A MUST READ
Interestingly enough this is all happening on the day of the last FOMC meeting before the Fed exits the MBS market. I do not anticipate anything new from the Fed on the asset purchase program though...at best we are hoping for added concern about the health of housing and the labor market. That would be quite helpful in tilting sentiment in favor of a "flight to safety" reaction in the rates market.
Ahead of the 2:15 release of the FOMC statement....
The benchmark 3.625% coupon bearing 10 year TSY note has extended early session positive progress, currently bid +0-05 at 99-18 yielding 3.678%. Testing the 50% retracement of the Dec.21 sell-off.
After hitting an early session price low of 100-25, the FN 4.5 reversed course and touched 101-00 before turning back toward the narrowing price range. I see two trend channels in the chart below. One is a sideways, slow grind to the right, the other is an ascending triangle aka continuation pattern. The latter is technically bullish as it indicates a price breakout to the upside is looming. What is most important about this technical observation is...A MAJOR FUNDAMENTAL EVENT LIES AHEAD: THE FOMC STATEMENT. This event has the potential to override any technical biases.
In regard to locking or floating ahead of the 2:15 statement release, if you are letting it ride, at least register your deals so you can quickly lock in the event of a TAPE BOMB from the Fed.
MORE IMPORTANTLY: Tiger Woods will return to golf at the Masters. John Daly just praised the heavens....now folks will actually show up to watch PGA events. Nice shower curtain jacket John.