Tuesday 7/8/08 ... OFHEO Speaks, MBS Listen

By: Matthew Graham •
The Numbers:

6.0% FNMA is up 8 / 32nds at 100-23

5.5% FNMA is up 10/32nds at 98-06

Both of these are much better than Yesterday's Levels

 
The News:

  •  Store Sales
    • Slightly Better than last month with a 2.3% Year over Year Growth
    • This is best level since May and some feel there would be further strength if not for fuel prices
    • All in all, though, not a major impact on MBS
  • Pending Home Sales
    • fell by 4.6% to 84.7 in May far lower than the consensus 86.4
    • This is a 14% decline Year over Year.  That's significant
    • Still, it's not quite as low as March (83.0)
    • All in all, not a major MBS mover, but it helps slightly if anything
  • Wholesale Trade
    • came in at .8%, the third lowest this year and down .5% from last month
    • This also is not a major market mover.  Helps if anything.
    • So what is the major market mover?
  • OFHEO
    • James Lockhart, OFHEO's director, said this morning that Fannie and Freddie were sufficiently capitalized
    • This counteracts much of yesterday's weakness versus treasuries and has greatly helped MBS today
    • If it's not already understood the reason for this is that Fannie and Freddie securitize MBS on the secondary market, so if they are at risk in any way, MBS would be a less sound investment.  This is a gross oversimplification, but in general, that is the "why" behind much of the MBS strength today.
Lock/Float Conclusion:
  • Float
  • Vigilance: Medium
It was a very wild day yesterday with a HUGE slide followed by a HUGE rebound after stocks sold off.  If stocks did not tank so badly, we'd still be hurting.  The OFHEO news is the only thing keeping us better than treasuries this morning.  Recently, FTQ (flight to quality) buying has been huge.  As the Dow has slipped towards 11,000, traders want secure investments so they turn to bonds.  Though treasuries yield less than MBS, the appetite for risk among FTQ buyers has been almost non-existent.  Combine that with shaky profitability news from the GSE's and we had recipe for disaster yesterday.  Again, the stock sell-off saved us.
 
Still, Fannie and Freddie's stability will not simply be "taken as read" overnight.  Traders and lenders alike will require more convincing before starting to operate on assumptions of GSE stability.  So traders will not be buying as much MBS in proportion to treasuries as they would in a more stable environment.  And neither will lenders pass on the full benefits of the MBS improvements they have seen.   
 
With no other major data being released today, tradeflows between stocks and treasuries will set much of the tone for MBS. Currently, the DOW is up 35 points.  Any significant rally could hurt MBS.  Nonetheless, until that does or does not occur, we'll float to give the vibes of stability time to permeate the market. Keep a watchful eye on the DOW and the 5 year note.  Large movements will likely translate to MBS.
 
The blog will be unavailable for updates between 1pm and 3pm Eastern time.  If you see a significant increase in 5 year yield during that time, it may be a lock indication.  The above is the worst case scenario time frame and if any negative news is apparent, we'll make every effort to get the information posted as quickly as possible.