MBS Outperforming in Quiet Environment. Benchmarks Break Support
The yield curve is bear steepening and "rate sheet influential" MBS coupons are in the red but well off the lows and outperforming benchmark guidance givers, AGAIN.
The 2s/10s curve is 3bps steeper at 222bps across. The 10yr TSY note is -9/32 at 100-14 yielding 2.574% (+3.1bps). 10yr note trading volumes are well below average and flows are mixed with a slight nod toward sell tickets. Quantitative traders are leading the originator unfriendly price movements as they poke and prode at the market's willingness to "buy on the dips".
The continuation pattern we discussed yesterday has played out . 2.46% resistance held and the pain trade continues to dictate direction in a thinly traded marketplace. 2.60% support is the next target for day trading short sellers. It's been over a month since 10s ticked over 2.60%. Again, trading volume is low and the bias to wave in new longs doesn't seem to be too strong at the moment( It's Friday + we get TSY supply next week). We're more likely too see a sustainable turnaround if 10s retest 2.60%. That's where the buy limit orders should kick in. Until then it seems like we're doomed to bounce between 2.54% and 2.60% (doomed at least for the rest of the day).
A similar story can be shared in MBS space with one distinct difference...sellers are not in control, nor have they been all week. Trading flows are thin but modest bargain buying combined with limited originator supply and a fast money bid have helped MBS outperform on a relative basis (not to mention general weakness in TSYs). Still price levels are lower thanks to the modest bear steepener on the curve (TSYs leading prices lower).
The December FNCL 3.5 is -1/32 at 100-28, well off the session low of 100-18+. The December FNCL 4.0 is -1/32 at 103-07. In my model current coupon is 3.412%. Yields spreads are tighter vs. 10yTSY, 10yIRS, and the 5yTSY.
The FNCL 3.5 found support in a highly-trafficked price range but the trend does not look like our friend at the moment. I'd say we should be expecting MBS to retest that red range.
Loan pricing is 23.6bps worse on average with the largest reductions seen in the note rates closest to par. This compares to rebate offered yesterday morning, before reprices for the worse. When comparing today's rate sheets to repriced release, par rebate is about 10-15bps worse . On a week over week basis, loan pricing is 27.7 bps better though. Buydowns are however more expensive, which means it costs more expensive to float down to a lower note rate (extending breakevens on points paid at closing)
Reprices for the better are possible but only if December delivery coupons don't crest in negative territory...
EXPLANATION OF LOAN PRICING COMPARISON
Buydowns are the cost of floating down to the next lowest note rate. Buydown costs are matched to the note rate in the same row. For example, the first number in the buydown column is .352%, this is the cost to float down from 4.875% to 4.75%,
as a percentage of the loan amount. This is important because it helps an originator determine the best execution rate/points combination for a borrower who has a good idea of how long they intend to keep their mortgage (breakeven on points paid vs. monthly payment savings). In the Buydown Delta column, red is cheaper. Black is more expensive.
The pricing change column is a direct rebate comparison of pricing today vs. pricing yesterday. Red is worse. Black is better.
The BE v M column shows you how margin is changing. RED means more margin. Black means less bps are baked into pricing.
I do not show the actual price lenders are paying for loans. This is too much info. I would get angry emails from lock desks and production managers. I will tell you this though, the comparison is based on raw pricing. There isn't another markup built into my model.
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I was asked by a reader yesterday what song I felt best described the current economic and political environment.
For What It's Worth....
There's something happening here
What it is ain't exactly clear
There's a man with a gun over there
Telling me I got to beware
I think it's time we stop, children, what's that sound
Everybody look what's going down
There's battle lines being drawn
Nobody's right if everybody's wrong
Young people speaking their minds
Getting so much resistance from behind
I think it's time we stop, hey, what's that sound
Everybody look what's going down
What a field-day for the heat
A thousand people in the street
Singing songs and carrying signs
Mostly say, hooray for our side
It's time we stop, hey, what's that sound
Everybody look what's going down
Paranoia strikes deep
Into your life it will creep
It starts when you're always afraid
You step out of line, the man come and take you away
We better stop, hey, what's that sound
Everybody look what's going down
Stop, hey, what's that sound
Everybody look what's going down
Stop, now, what's that sound
Everybody look what's going down
Stop, children, what's that sound
Everybody look what's going down
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