MBS End Choppy Session On Level Ground. Spreads Wider

By: •

Rate sheet influential MBS valuations had another volatile day thanks to some violent swings in the stock market. We did however make it through normal work hours without reprices for the worse, unfortunately the damage was done to mortgage rates early in the day when equities opened near their session highs.

The FNCL 4.5 trend channel continues to consolidate....

As for the stock lever, our primary guidance giver of late, the S&P failed to do what the rest of the world did last night: CLOSE IN THE GREEN! The S&P went out -0.57% at 1067.95...just above the 1065.94 low print. As you can see from the chart below, the bulls have been unable to push the S&P through 1090 over the past five sessions.  Seems like equity side traders are waiting for more guidance.

Until the S&P closes above 1090, mortgage rates will likely hold near the lows of the year.

You know our long term LOCK/FLOAT stance...

Thanks to a lack of liquidity in the 4.0 TBA MBS market, securitizing 4.5 and 5.0 MBS is a lender's best execution option (how do you hedge 4.0s right now? Against the long bond?)  This implies it is unlikely that we see  mortgage rates move any lower than current levels. Considering the amount of volatility in the marketplace and the tightly wound correlation between the stock lever and interest rates....passengers in the float boat s/be waiting it out for a shorter lock period at most. Besides that...the risk that rates rise far outweighs the minimal reward one would see if stocks sell and benchmarks rally. When/if stocks break 1090 and confirm, interest rates will move higher in a violent manner.

Have a good night.