Fannie Mae Clarifies Timing of Delinquency Buyouts. How Does this Affect Rates?

• Ugly AM got prettier as 4.5's made it back to unchanged at 100-31
• 10yr yields actually down a bp to 3.66 (were as high as 3.7 this AM)
• Potentially unseen lift from Fannie delinquency buyout release
  
• If trying to recover lost YSP from this AM, still safe to wait it out.

Things looked pretty bad this AM as bonds opened much worse than even an extension of yesterday's weakness would suggest.  Lockers rejoiced.  Floaters readied their cyanide pills.  But in the previous commentary, AQ discussed a chain of events starting with a stronger dollar that has resulted in MBS getting back to unchanged on the day after commodities led stocks lower. 

And though there is a bit of movement, we're now approaching that "out of the woods" time of day where prices will either level off as volatility (and participation) dies down, or where volume is just too low to suggest caring about any volatility we do see.  Either way, we're good for now, and if you're waiting on getting some YSP back, we'll let you know if that no longer looks like a safe place to be.

The lower end of the stack (the 4.0-5.0 coupons we care about) are potentially getting some support from an unseen hand today in the form of the release on the Fannie Mae 120+ delinquency buyout schedule.  With Fannie the center of attention today, both Freddie and Ginnie are outperforming in the upper coupons.  This is occurring because a threat to investors profits on those higher fannie coupons has been clearly delineated.  If they know something they paid 106-00 for will soon be repaid at 100-00--much sooner than they had hoped, those coupons start to look like less and less of a good deal---which adds a bid to "rate sheet influential" MBS coupons and helps offset wider yield spreads.

 Here's the breakdown straight from fannie (click on it to be taken to a larger view).

You might also guess that if something is bad for higher coupons, it might be good for lower coupons--at least inasmuch as investors that ditch the premiums want to stick with MBS.  This is very likely a factor in today's spread tightening and may continue to be a factor giving a small, but noticeable artificial boost to the coupons that affect our ratesheets. 

Yes, that's a good thing, but with Fed exit on the horizon and historically tight spreads to begin with, there's not much room to be long the basis ("long the basis" = support spreads moving tighter, aka, favor buying MBS vs. Tsys or other alternatives).  We'll get a better sense of the salubrious and desultory effects going forward.  Desultory you ask?  Why yes... Because consider what happens when all this 120+day buyout hullaballoo is over...  The newly decontaminated premium coupons will likely win out on a relative basis versus lower coupons.