MBS Get Banged Up as Lock Desks Add More Pipeline Protection

It was not a good day for agency mortgage-backed securities. Lock desks continued to hedge their pipelines by selling loan supply. About $3bn was offered all day, add that to the $2bn+ that was absorbed yesterday. During this process TSYs were rallying and MBS buyers went MIA, leaving mortgage valuations at the mercy of dealers who were forced to lower their asking price to attract willing buyers. Although I observed some spread tightening in the lunch hours, implying there was some bargain buying interest, MBS were under pressure for most of the session.

The November delivery FNCL 4.0 ended the session -2/32 at 102-19. I've got the production MBS coupon at 3.621%. Yields spreads are as follows: 106.8bps/10yTSY, 102.3bps/10yIRS, 230.5bps/5yTSY.  Wider on the day but off the wides. We closed right on one of our pivot points, leaving room for prices to meander in either direction. Clearly the 103 handle is firm resistance.

Reprices for the worse were reported after a better than expected but still crappy read on Existing Home Sales. On average, loan pricing was 11.1 bps worse when the dust settled. Week over week, rebate is 45.2bps better. If you're on the fence about locking, I hope that provides some perspective, you're still deep in profit taking territory.

THIS POST has an explanation of the metrics listed in the table below.

With $5bn in pipeline protection added in the past two days, at the percieved price highs (hint hint originators!), one has to assume lock desks will soon slow the pace of pipeline hedging. This combined with excessive valuation cheapening today should draw in buyers of the basis tomorrow. Of course, price directionality and consequently rate sheets are still dependent on the behavior of our guidance givers, TSYs and swaps.

Traders clearly displayed their bias to take profits on the 10yr note when yields dipped below 2.50%, as expected! 10s closed near the yield highs, giving back all their early gains, going out +0-00+ at 100-20 yielding 2.553 (-0.2bps). The 2s/10s curve was 213bps wide. 10yr interest rate swap spreads were 4.5bps wider.

With both the FNCL 4.0 (103-00) and the 10yr TSY note (2.50%) trading near firm resistance levels, I continue to favor locking deals closing in the next 15 days, otherwise there is room to float and not lose your rate quote if pricing deteriorates. I expanded on lock/float signals in these two posts....

Jobless Claims Increase. Benchmark Rates Test Resistance. MBS Lag into Rally

MBS Buyers MIA. Guidance Embedded in Recent Behavior

Econ data should move the markets tomorrow. HERE is a calendar