Lack of New Loan Supply Helps Mortgages Extend Post-Fed Rally

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Good Morning.

I'm not much of a late night talk show guy but I found it interesting to hear that Conan O'Brien, who hosted "The Tonight Show"  for less than a year, decided against signing with Fox in favor of TBS after Jay Leno was politely asked to reclaim his thrown on the best gig in showbiz.  I would say putting Conan on after "The Office"  would work well with my demographic, but TBS airs six consecutive episodes of "The Office" beforehand...thus I have developed an "auto skip" trait in my remote trigger finger for channel 247. I can only stand so much mockumentary comedy. More Family Guy please TBS. Or hockey. Or anything about outer space...I get sucked into anything that explores the celestial unknown.

The bond market saw better bidding through the belly of the yield curve (5s,7s,10s) yesterday for a variety of reasons that cannot be quantified or qualified. With no meaningful data on the calendar and policy makers all quiet, we decided to remove anything that could be considered "noise" and point out the obvious: benchmark rates felt the gravity of key technical levels

The 3.625% coupon bearing 10 year Treasury note rallied in the early session hours yesterday, falling from 3.92% all the way back down to 3.85%. This rebound held in overnight trading thanks to weakness in overseas equities and a slower than expected start to the earnings season (it's always Alcoa's fault. Or Jill's).

The 10 year note is currently +0-07 at 98-16 yielding 3.811%. That means we are now 4bps inside our 3.57 to 3.85% range. My target is a test of 3.78%....that is if we can get past 3.80% first.

Depending on your perspective, mortgages had a great day yesterday. The FN 4.5 rallied in "face-melting" fashion, gaining 17/32 to 100-08 yielding 4.477%. Not only were price appreciations abundant, MBS coupons greatly outperformed their benchmark big brother TSYs aka yield spreads were tighter! EXPLANATION OF YIELD SPREADS.  

"Rate sheet influential" MBS coupons are starting the session in an originator-friendly fashion by extending yesterday's positive progress. The FN 4.5 is +0-08 at 100-15 yielding 4.451%. By my scorecard that puts the secondary market current coupon at 4.441%. The CC yield is +63bps over the 10 yr TSY note yield and 68.4 basis points over the 10 year interest rate swap rate. Slightly wider but unchanged for the most part...

REPRICES FOR THE BETTER CONSIDERED AROUND 100-22 FOR EARLY MORNING PRICERS LIKE WELLS.

REPRICES FOR THE WORSE CONSIDERED AROUND 100-08 FOR EARLY MORNING PRICERS. Others are just now pubishing rate sheets

While there may have been several forces boosting bids in TSY market, there is no confusion as to why mortgage valuations improved yesterday (think yield spread here..not price. very important!).

THERE IS A CLEAR CUT LACK OF NEW LOAN SUPPLY IN THE AGENCY MBS MARKET. Combine that with a general slowdown in mortgage specific trading flows (+modest short base that will be squeezed) and you have a recipe for MBS relative value success (tighter spreads).

Plain and Simple: a slowdown in new loan production has completely offset the Federal Reserve's exit from the agency MBS market. Yesterday, originator pipelines were so tapped out that it only took a modest amount of buyer demand to advance the mortgage rally.

LOCK OR FLOAT?

We were patient when 10s touched 4.00% and the FN 4.5 fell below 100-00 as "PLAY THE RANGE UNTIL THE RANGE PLAYS YOU" echoed in our head. Ten days later, 10s are 20bps lower in yield and the FN 4.5 is managing to keep pace.

If I told you two weeks ago, when rates started to sell off, that I could offer you 75bps more rebate on April 13...would you have said "I'LL TAKE IT"? If the answer is yes, you should be locking.

If you are counting down the days until you can sell a 30 day or 60 day lock...I think its safe to keep playing the market, but keep a close watch on the price spread between the 30 and 60 day (or 15 and 30). If an extension is cheaper and rates reverse course, lock it up. If an extension is not cheaper...pay very close attention to your breakeven level. Set a stop-loss and lock if your incur a cost. The goal is to maintain profitability here....

While we have been advocating a return to the 3.57 to 3.71% range...it doesn't mean lenders will be willing to keep pace. Don't get mesmerized by price action in the bond market, take what's given to you and compare it to your own personal historical range. If you are approaching the high side of your rebate range...its time to lock up some pipeline profits. I know many of you are in this camp too....

PS: the 2s/10s curve has finally broken from its boring sideways range. The curve is 4 basis points FLATTER at 278bps.