The MBS Ledge: Are We Still Teetering? What's at Stake Here?

Today's MBS price movement shouldn't stress you out. Not Yet. They should make you very defensive, but not stressed. Not yet....

Yes, we ended down on the day. Yes, it looked good up until 2pm, but to quote myself: "these are the realities of the post-range-breakout bond market." 

AND WE CAN'T FORGET: We're operating with a handicap where anything can and will be used against the bond market.  Stocks are in favor and bonds have been cast out of the garden. 

With that in mind, today has ended with lower MBS prices because several opportunities to pressure interest rate prices lower were taken advantage of by traders. Those opportunities are almost always taken these days.  It's that simple really, it's the most basic explanation we can offer for bearish technical momentum that still needs to be reversed.

In the big picture, while loan pricing is still very sensitive, we have only inched closer to "The Ledge". And we still have one maybe two major, high volume, sell-offs before current market "Best Execution" jumps up to 5.375%.   We need to see snowball selling before that happens.....we don't want to see it though. That's for sure...

See what we mean by defensive? It only takes a couple of consecutive down days. That means decision time is always just around the corner. BE DEFENSIVE.

That is what's at stake here after all. 5.375% BEST EXECUTION.

So why'd we end up with the Matterhorn at the end of the day? 

Combination of reasons really, and the mix of which among them bears more responsibility than the next is debatable.  Certainly, we know that the Budget Deficit hitting it's 2nd highest level ever was reported at the same time the sell-off got moving directionally.  So I'd put that on a short list of suspects for sure.  There were also comments from Fed's Lockhart speaking soothe about high enemployment about 15 minutes later. 

And of course the talk of the mortgage town followed about an hour later when early details of the Obama Administration's white paper on GSE reform were shared with news outlets. Focused mortgage weakness as it relates to preparations for "Snowball Selling" could have forced some investors to sell of portion of the Treasury holdings as well. We call this "extending".  In terms of the impact of the soon to be released GSE Reform White paper on the MBS market and current coupon valuations...This "headline event" has already been leaned on as motivation for fast money day traders who need an axe to grind. Yield spreads are indeed wider into lower prices today so the implied headline risk will likely be pointed to as the reason behind it. Lower and wider hasn't been uncommon lately though. We're just off recently rich valuations and now we're teetering on  shift in duration bias.  This would push the production MBS coupon up to 5.00% and lead "Best Execution" mortgage rates higher (5.375%). READ MORE ABOUT THE SHIFT IN PRODUCTION COUPONS

But the treasury chart will tell you that not much happened.  Feeling optimistic in the morning?  Trade yields under the pivot.  Kinda queasy 'bout the Budget Gap and White Paper uncertainty in the afternoon?  Trade yields back over the pivot.  Can I go home now?  Sure...  Go ahead and show MBS some support around PAR and the 10yr some support around 3.72, keeping each of those markets limited to say.... an 8 tick loss on the day?  Then you're free to go.

What a mixed picture. We've seen lots of short covering lately. So maybe this is a sign that 3.70% will hold....

Tomorrow's candidates for economic report-driven excitement include the Trade Balance at 830am and Consumer Sentiment at 955am.  Oh and the GSE Reform White Paper. You can read more about them, see the consensus estimates, and a few snippets of quotes from economists at the bottom of The Week Ahead.