Bond Rally Lacks Real Money Support. Sustained Commitment Needed

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All hell seemed to break loose in global markets today.

Stocks plummeted around the world. Commodities tanked to the tune of 2-5%.  And a flight to safety poured into U.S. Treasuries. This is an encouraging development for rate-watchers, but the bond rally lacked substance, it lacked commitment.

The directional move seen in rates early in the day was driven by fast$ day trader short covering. This is basically forced buying or a panicky reaction to a violent shift in benchmark yields.  Real money accounts, those who manage asset cash-flows vs. liability cash-flows, the investors who must commit to lower rates, were hesitant to head "down in coupon".  And they will continue to push back until this rally is confirmed and sustained.  This is exactly what we've been talking about lately...

From MBS LEDGE: Room to Rally with Little Reward to Offer

"Lenders have moved the Best Execution 30-year fixed note rate as low as they possibly can without drastically altering their pipeline hedging strategies.  This is a factor of what production mortgage-backed security coupon is most liquid in the secondary mortgage market. On conventional loans, the 4.50 percent MBS coupon is the hedging vehicle of choice for lock desks.  Home loans with note rates between 4.875 and 5.25% are generally used to fill 4.50 percent MBS coupon trades. Until MBS investors demonstrate sustainable demand for 4.00 percent 30-year fixed MBS coupons, lenders will not find it economically efficient to quote 4.75 percent note rates without expensive permanent buydown costs. From that perspective, if you are floating a conventional home loan interest rate, you should not be expecting further improvements to your actual rate in the short term. If the bond market recovery rally continues, closing costs will improve, but on the whole, it will take a sustained move higher in 4.00 percent MBS coupon prices for Best Execution to dip below 4.875 percent."

Rebate clearly improved though. Unfortunately "Best Execution" mortgage rates barely budged and there is still a sizable drop-off between 4.875% and 4.75% C30 pricing. Some lenders are offering enough overage to allow for 0+0 C30 4.75% quotes, but those deals are skinny and it would require your borrower eluding risk-based LTV adjustments.

Plain and Simple: The trading environment is supportive of lower rates, but the rally will take time, patience, and much commitment from real money investors. In the meantime, profit takers will be quick to ring the register. MORE "WAIT AND SEE".....

Random Notes...

  • The 2s/10s curve flattened 7bps to 269bps wide today. This is a positive development for bullish bond investors.
  • Trading volume was massive in 10-yr note TSY futures. Overnight activity was robust as Asian investors panicked to reallocate funds. Day trading led to an uptick in flows during the U.S. session.
  • MBS trading volume was low vs. 60-day averages and loan production was once again meager. FNCL 4.5s saw the lion's share of originator hedging. 4.0s got little love from lock desks.
  • CC spreads were mostly UNCH to slightly wider vs. benchmarks. Here's my marks: Secondary Market Current Coupon -4.9bps at 4.113%. +81bps/10yrTSY, +69bps/10yrSWAP, +215bps/5yTSY
  • The Fed hinted at an upgrade in economic conditions. Saying the information received since January "suggests" the economic recovery is on "firmer footing". The labor market also "appears" to be "improving gradually". Household spending and business investment continue to "expand". On inflation, the Board acknowledged rising food and energy prices but said it anticipates the effects to be "transitory" or temporary. Longer-term inflation expectations are stable. The Fed made no mention of the crisis in Japan or conflict in Northern Africa/The Middle East. The QEII bond purchasing program is expected to continue as planned before ending in June. No voters dissented the decision.
  • Reprices for the worse were reported before and after the FOMC Statement as investors took profits on the bond market rally 
  • Fed Urged to Delay Originator Compensation Regs: FULL STORY