MBS End Week At Best Price Levels Since Fed Was Buying Mortgages

By: Matthew Graham •
  • 4.5's close 10 ticks up at 100-27
  • 10yr notes bottomed out at 3.659
  • Secondary Market Current Coupon -5.3bps at 4.374%.
  • Prices Higher But Yield Spreads are Wider
  • CC +71.5bps/10yrTSY
  • Stocks Tanked, but again, still inside a recent range. S&P -1.66% at 1186
  • How long will it last?

For only being 10 ticks up, MBS "felt" like an insane rally.  Maybe that's because the rally started out at what had been a huge previous turning point, or maybe because it's the end of a month that has seen MBS do pretty much nothing but go up (granted, with plenty of "back and forth" but just think "2 steps forward one step back"). 

Well...  The chart'll tell ya.  Look!

See April?  If you have really blurry vision, it looks like a diagonal line moving up up up.  How about that trend channel we can't get enough of in 10yr treasuries? 

Unlike MBS, no major trend violations (at least to the extent you're not looking at 3.73 as a horizontal trend--which you'd be perfectly entitled to do, but I'm not.  So there we are).  However, on the bright side, there is room for some low, sideways action leading up to NFP, and enough room in the trend for yields to dally.  HISTORICALLY HOWEVER, if you glance at the other big drops in yield this month, you'll see that this rallies don't hold the new range for more than a day or two!!!

Cause for concern?  Maybe...  At least the "trend is your friend" mentality is suggesting a bounce off that lower resistance is possible.  But there is an even broader trend that I'll have to spend some more time putting together a chart to convey.  Basically, more often than not, the overall direction that yields move in a given month is the same direction as their first big move after NFP.  Sounds like an overgeneralization right?  But it's a pretty regular phenomenon.  Remind me to get that chart to you on Monday if you don't see it then.

As far as locking/floating/predicting the future, etc... 

Most of what I want to say to you was said in the previous post, so here's an excerpt:

Take a careful look at the charts and how good your pricing is, and consider the trend channel in treasuries is now closer to indicating a move higher in yields unless the trend actual BREAKS.  But I'm guessing if it breaks to the downside, we'll all be so happy (and busy) anyway, that we wouldn't feel too bad about having locked when the charts made it look like it was about time to lock.

By the way: that doesn't mean "lock right now!" .  I'm purely speaking to those among you who consider your options in the hour or two before lock cut-off and whether or not you'll be "floating another night."  If my rate sheets were "better enough," I'd likely lock a portion tonight simply because the trend channel in the 10yr tells me to. 

Along those same lines, I'd also only consider the profitability of a deal in the context of when it arrived.  Even if MBS improves next week, it's still a net-gain deal if it was originated almost any time since march 23rd.  That means it's hard to go wrong with whatever you do, and as always, we'll give you a heads up if trouble looks to be brewing."

The moral of the story is one of "profit-taking" despite potential continuation of the rally.  I don't think we'll go much below 3.65 in the 10yr yield during the first part of next week, UNLESS there is an additional unexpected headline either relating to or similar to the Greece drama.  Treasuries *probably* will move up a bit in yield and MBS will tighten tighten tighten on that weakness, like they normally do on an NFP week that follows a month-long rally.

Month long rallies in and of themselves are sometimes sufficient cause for the momentum to take a break, either to merely "catch it's breath" or worse: to reconsider it's previous direction altogether.  Either way, it's really hard to go long with locking IF you've seen a good amount of gains passed on, have originated the deal on a date when rates were worse, and would likely see new business come in or be unencumbered if rates happen to improve further. 

So yes, I do lean toward locking, and the safer way is to take a look at cut-off tonight.  Be aware though, this is not an argument that rates get worse and never get better.  Bottom line: that trend channel is intact until it's not intact anymore!!!!!!

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Now for some fun for anyone that's here late enough or has read far enough to get here.  Many months ago I posted a chart out of left field with some homemade technical analysis.  Basically, when looking at charts of MBS, I sometimes feel how I'd imagine Neo feels when looking at the ostensibly incomprehensible series of pictures on The Matrix.  I don't necessarily see the woman in the red dress, but on that occasion, I did see some noticeable repetition of patterns.  Back then, there were two patterns formed and it looked like we might be getting into a third.  So I drew some lines and shapes over the existing chart to show just some general similarities in the way the prices moved.

Keep in mind that the actual PRICE LEVELS had NOTHING TO DO with the similarities.  I was just looking for SHAPES.  In other words if something went "up a bit," then "down a bit" then "sideways in a range" then "way up way fast," followed by "way down way fast," this was all I needed to consider it a FRACTAL as long as that same series of movements repeated itself.  This means that some of the moves were larger and smaller than others, but hopefully you'll get the idea.

The disclaimer is that neither of these two charts necessarily mean anything, I just thought it's one of those interesting things to think about if that kind of thing floats your boat.  If not, please forgive me.  But if you see some crazy higher power MBS gods at work, chime in!  If you're that crazy, you're among friends!

MBS FRACTAL:

this one has 3 distinct moves in red

1. "big sell off, rally halfway back, turn corner back lower, rally 4/5ths back, drift sideways lower into next phase.

2. in white: sideways in distinct range, with firm resistance underneath in 3 distinct "waves" of roughly equal time and intensity.  (the first white square looks like the intensity increases, but the last two waves are "spikier" than the first, and never really materialize into anything much higher than the first wave's apex.

3. In teal, after selling off slightly from previous phase, prices "scoop" and "ramp up to another high, sell off mildly again (about the same distance as final sell off from phase 2), and rally back very close to most recent high.

NOW!  If fractals come in 3's, guess what happens next...  So how superstitious are you?

Here's another one that I went to slightly less trouble on in stocks.  Less definition this time because, well, frankly it's Friday, and I want to be done writing now.  But if you got the picture the first time, you'll get the picture this time too.  Have a great weekend.

hint: 2 cycles, each consisting of

1. small parabola,

2. big parabola, both hitting same support,

3. finally a fast and relatively smaller dash up from the same support, down to break through the support, and back up to the support again. 

The action from the 29th on would be like the first parabola in a new cycle meaning (if you're superstitious), a crazy big parabolic movement coming right up!