MBS Losing Steam as Benchmarks Backup. Prepay Report Due
We find ourselves in one of the big vacation weeks of the year, since workers, many with summer vacation kids, have to use up only 4 vacation days to gain 9 days away. Whether they work trading mortgage-backed securities, underwriting, funding, etc., many companies find themselves with reduced staffs, and things seem pretty quiet out there. At least, underwriting and policy changes seem few and far between. -Pipeline Press
Typically, in weeks like this, the bond market and mortgage rates take their directional guidance from the general sentiment of the market. Stock market sentiment is highly negative and low bond yields continue to reflect weak investor appetites for risky assets. This week is also a popular summer vacation timeslot, so investor participation will be below average. Because the scheduled release calendar is thin and many investors have moved to the sidelines, we do not expect a major shift in consumer borrowing costs this week. -Mortgage Rate Wate
Good summer vacation movie: HERE
I'm trying to avoid overthinking the market right now. Investor attention is generally occupado elsewhere at the moment, size is lacking, and chopatility is abundant. But if I were to overanalyze...
S&Ps have broken yesterday's high. The number of open contracts rose into the rally. And so did volume. Since then, support at yesterday's high is holding positive progress in tact (1036). But will it hold into the close or will profit taking ruin the positive progress?
The stock lever is engaged. Interest rates are higher. The benchmark 10yr TSY is -0-07 at 104-19 yielding 2.961%, +2.5bps in yield but still under 3.00%. The long bond is suffering the most, -0-22 at 107-25 yielding 3.93% (+3.7bps)...but still under 4.00%. The 2s/10s curve is 3bps steeper at 235 across while the 2s/30s curve is 5 steeper at 332bps.
Plain and Simple: rates are higher but range bound between the long-term internal trendline and the long term fibonacci fan...and below 3.00%
Rate sheet influential mortgages held their own against rising benchmark yields (lower prices) for most of the morning...but are now starting to give back gained ground vs. TSYs. The August delivery FN 4.0 is -0-02 at 101-07. The August delivery FN4.5 is -0-02 at 103-16. The secondary market current coupon is 0.008 higher at 3.792%. Yield spreads are off their tightest levels of the morning. The July FN 4.5 hit 104-00 today!
I haven't looked at pricing but I know some lenders were late to publish today. Without checking rate sheets, look for reprices for the worse if the August FN 4.0 falls below 101-05.
For the past month or so the street has been trading mortgages under the assumption that prepayment speeds would rise in June. This means the market sees "rate sheet influential" MBS coupon yields lower than where I've been communicating. The June prepayment report prints this afternoon. I've been running the current month delivery FN 4.0 yield using a 6 CPR and the front month Fannie Mae 4.5 at an 8 CPR. For the purpose of keeping the secondary market current coupon, the 4.0's coupon yield is more important in determining yield spreads (relative value/opportunity cost). We'll find out tonight if our assumptions were accurate. Either way, unless the 10yr note yield backs up and stocks start to rally...demand for production MBS coupons will be strong.
Plain and Simple: barring a huge surprise in prepayment speeds, "rate sheet influential" MBS coupons will continue to benefit from strong investor demand...as long as Treasuries retain their flight to safety bid.