MBS Buyers MIA. Guidance Embedded in Recent Behavior

Yikes. It may not be obvious to the naked eye but "rate sheet influential" MBS are getting torched today. I've got yield spreads 5bps wider vs. TSYs and swaps (nominal basis. As benchmark yields dipped lower yesterday into this morning, the bid for production MBS coupons went M.I.A.

I don't want you to think I am panicking about a massive sell off and consequential spike in mortgage rates though. Overall the environment remains supportive of low rates. I don't expect consumer borrowing costs to skyrocket. In the here and now, we are missing some key buyers (JAPAN AND CHINA OUT), plus lock desks were selling supply yesterday so there is good reason for localized weakness in our market (dealers too long?).

More than anything we should view this price action as an indication of when to lock and when to float. PLAY THE RANGE UNTIL THE RANGE PLAYS YOU!!! The range has been true to us all month.  Another aspect of this theory relates to lender capacity constraints.  If we know mortgage rates will be most aggressive when the November FNCL 4.0 is trading at the top of the range, we should expect more rate locking when 102-20 is broken. Once lenders fill up their pipelines, extra margin will be baked into loan pricing.

This implies those lock signals I was sending out last night and this AM, based on the range and when lock desks are hedging, should continue to provide directional guidance for float boaters:  READ THIS POST FOR MORE GUIDANCE. MBS NOT A FAN OF 10s below 2.50%

November FNCL 4.0s are currently -2/32 at 102-19.  Our first layer of support has been broken....reprices for the worse possible.

FYI RE: TSY AUCTIONS NEXT WEEK....

RTRS-US TO SELL $36 BLN 2-YR NOTES SEPT 27, $35 BLN 5-YR SEPT 28, $29 BLN 7-YR SEPT 29, TO SETTLE SEPT 30