3.50 MBS Coupon Trading Over Par. Reprices Due from Lenders.

Rate sheet influential TBA price levels have recovered from the "sell off" we experienced late last week and are pushing new record price highs, again. Read "sell off" as "taking a breather".

The August delivery FNCL 4.5 is +0-08 at 104-19. The secondary market current coupon is 4bps lower at 3.675%. Current coupon yield spreads are wider as benchmark TSYs rally and 10yr swap spreads inch higher but remain in negative territory.

104-19+ is the new record high print for the FNCL 4.5.

The secondary market current coupon is the MBS coupon that would yield ZERO loan prepayments in the primary mortgage market.  From a quantitative perspective, it is the MBS coupon that is priced at 100-00 (in theory).

Well...

The front month 3.50 coupon is "bid" over par right now, so technically the secondary market current coupon is under 3.50%. I however run my model a little differently than dealers.  I have kept my current coupon heavily weighted with the 4.0 coupon because the primary/secondary spread is wider than the street sees it and negative convexity is one of those "the only thing to fear is fear itself" measure.  I'm not sure what I would call my version of the current coupon, but it's much closer to reality than where the street has it marked at the moment, you might say MBS are overbought.  In that regard, if we do see a duration shedding event, my model should give you an idea of how much mortgages have to sell off (initial knee jerk) to realign with the realities of the primary mortgage market (+60s/10s vs. +70s/10s). I doubt that happens though, at least not until after the roll, and even then buyers have been jumping on weakness whenever it presents itself thanks to a continued "flight to safety" bid for agency-MBS coupon clips and a general shortage of supply. 

re: 3.50s

Although there are a few lenders offering rates below 4.375% (at a cost to borrowers),  I'm still not hearing much good news in terms of new origination flows into 3.50s. The biggest supply day I've seen for 3.5s was last Friday, even then seller flows were modest at most.  This implies 4.25% plus points is as good as it gets for the time being, which isn't far from where the "best execution" mortgage rate is today. This doesn't mean you won't see 4.125% paying rebate on a rate sheet in the future, it just means originators aren't hedging their pipeline forward with 3.50 TBA MBS.  Desks are either trading a more profitable coupon swap or running supply directly into their servicing arm's portfolio.

Loan pricing is 4.8bps better on average today. Buydowns continue to be most expensive around the lowest note rates (those that would be securitized in 3.50 MBS). This implies a consumer who wants to pay points to obtain that 4.25% note rate will have to wait a few more years to breakeven on the points they paid at closing (vs. what they save in monthly payment). 

Lenders continue to pad their pricing to protect their pipeline from fall out risk.  This is illustrated in the wide spread between Best Efforts pricing and Mandatory pricing.

On a week over week basis, loan pricing is almost 40bps better. This means you can expect to see the Freddie Mae PMMS Rate hit another record low this week.

The September FNCL 4.0 is +0-10 at 102-01 and the September FNCL 4.5 is +0-10 at 104-09. These are intraday highs. Some lenders may reprice for the better. If this were a normal environment, all of the majors would've recalled and repriced for the better by now.

Trading volumes are still low. Don't miss THIS POST about the slowest month of the year on the street.

ps. vol is catching a bid today. not sure if it means anything yet, could've just been the cheapest hedge