Sharp Losses Seen in Production MBS. No Snowball Selling Yet
This is the reality of the brave new world that is the post-range-breakout bond market.
We've been discussing the probability of big movement once bonds were no longer range-bound and although we'd have hoped for the other direction, we are indeed seeing those big movements after stored energy was released. The 10yr TSY yield, as the most popular benchmark and official spokesperson for "the range," has wasted no time and given no false pretenses about what's going on during the last 3 trading days.
Stored energy released! Bear Flag Continuation!
Momentum is back in fashion. So anything can and will be used against the bond market until short sellers are satiated. Until then, everyone and everything a pileon. Case in point, last week, Fed Funds Futures ticked up from the 20's to the 70's (%) likelihood of rate hike in 2011. Today, we're into the 90's. Hello!?! Herding in the most over-crowded spot of the yield curve! Now, granted that Fed Funds Futures are currently highly sensitive to rate hike rhetoric and the short end is highly populated, we'd expect a bit of "herding" or "keeping up with the Jones'" if you will, but this still hurts us in the mortgage world.
The horribly low indirect bid (horribly high % taken by dealers) seen at the 3-year note auction just happens to come at an inopportune time. Here we have a limited day of data tomorrow with the focus squarely on underwriting auction supply. China just raised rates. You got 2 Fed speakers out adding fuel to the bond-selling fire, and if you're the 10yr note, you just saw your little buddy the 3yr get beat up and now traders are looking directly at you as their next target for concessionary torturing. How many stars can you count? Most are aligned against the bond market today......................
MBS watchers have one additional misaligned star: The Monthly Roll. Granted the roll isn't negative for current loan pricing scenario, but it does change the picture of the long term charts so that we're as low as we've been in 4.5's since May. Perhaps even more scary, it means the most current vintage of TBA-MBS 4.5's currently sit just UNDER PAR for the first time since April 2010!
Momentum is not our friend but the benchmark curve is steep and never ending chase for yield continues on Wall Street. Are we really talking about a Fed Funds Rate Hike by the end of 2011? When did QEIII go off the board? Last we heard the Fed Chairman was pretty concerned about the health of the labor market, an unsustainable budget deficit, and weak core inflation metrics....
The potential for this to get worse before it gets better is very real. We have yet to see snowball selling in the MBS market. That would certainly seal the deal for a shift higher in production MBS coupons. READ MORE