MBS RECAP: Quiet Recovery

NATIONAL ASSOCIATION OF INDEPENDENT HOUSING PROFESSIONALS, INC.’S REPLY TO THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM’S MEMORANDUM IN OPPOSITION TO PLAINTIFFS’ APPLICATION FOR TEMPORARY RESTRAINING ORDER AND PRELIMINARY INJUNCTION: http://www.usloans.com/reply.pdf

Reprices for the better have been reported but haven't been widespread. Lenders who recalled and repriced for the better are basically unchanged on the day while desks who decided to hold out on reprices are anywhere from 10-25bps worse than they were on Friday. After reprices, C30 pricing is 7.9bps weaker on average today. The cost for a consumer to permanently buydown their rate from 4.875 to 4.75 is 96.9bps on average among the five major lenders. With rebate lacking on that note rate, we do not advise originators encouraging this buydown unless the borrower intends to keep their mortgage outstanding for at least the next 10 years.

The staffs of the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corporation, the U.S. Securities and Exchange Commission, the Federal Housing Finance Agency, and the Department of Housing and Urban Development (together, the agencies) announced that the agencies this week are considering for approval a notice of proposed rulemaking that addresses section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. All of the agencies participating in this joint rulemaking process are expected to consider the rule this week and a detailed announcement will be made when this process is complete. If approved, the agencies will publish in the Federal Register a notice of proposed rulemaking for public comment. Section 941 requires the agencies to prescribe rules to require that a securitizer retain an economic interest in a material portion of the credit risk for any asset that it transfers, sells, or conveys to a third party. The chairperson of the Financial Stability Oversight Council is tasked with coordinating this rulemaking effort.

A blase feeling has settled in over the marketplace. Volume is below average and flows are scattered. The 10-yr note is hovering near unchanged levels and stocks are flat. Production MBS coupon prices have however rebounded from intraday lows and some reprices for the better have been reported, but nothing widespread. The five year note is the weakest maturity on the curve ahead of tomorrow's $35 billion 5-year note auction.

(Reuters) - The U.S. economy is on track for a sustained recovery but remains sufficiently weak to warrant the help of loose monetary policy, Atlanta Federal Reserve President Dennis Lockhart said on Monday. "I remain satisfied that the current stance of monetary policy is appropriately calibrated to the current and projected state of the economy," Lockhart said in remarks that largely resembled a speech he gave in Florida on Friday. Lockhart's suggestion to reporters following that event that the U.S. central bank's $600 billion bond-buying stimulus should be seen through to its conclusion put him at odds with James Bullard, the St. Louis Fed President who over the weekend indicated a proclivity for perhaps curtailing the program. Lockhart said he was not worried about the threat of inflation at the moment, in part because growth in wages, a big part of business costs, has remained so tame. "While short-term measures of inflation have accelerated in the last few months, I hold to the view that this trajectory will not continue," he said. Inflation fears have ratcheted up recently on a spike in oil and commodities costs, driven in part by political upheaval in countries like Libya and Bahrain. Oil traded in the United States has risen to near $105 a barrel. However, he said the Fed would watch inflation expectations measures closely for signs that an inflationary psychology is taking hold. For some economists on Wall Street, this was already happening, though some measures of underlying costs remained tame.

- High Yield : 0.789% *** Bid to Cover = 3.16, well below the 5 auction average of 3.47. Dealers took 18.6 bln or 53.8% of the 34.6 bln in total competitive bids, while indirect bidders took 11.4 bln or 32.95%. The dealer hit-rate was 24.6% while the indirect hit rate was 68.7%. The market's initial reaction to the auction is bearish for bonds with the 10yr note moving from 3.436 to 3.459 and FNCL 4.5's falling to 101-21. Although bonds seem to be putting in a few supportive bounces here, if MBS fall past the 101-20 level, reprices for the worse could be a risk, effectively reversing the moderate amount of bullishness seen before the auction with a moderate amount of weakness.

The lowest stock prices of the morning roughly coincided with the lowest bond yields of the morning, but both have been moving sideways since then, and in recent minutes, have made a slight bounce higher. In terms of the bond and MBS markets, 10yr yields were unable to get through 3.43 and FNCl 4.5's got capped out at 101-24. Reprices for the better have continued to trickle in, but lenders may not be as eager to reprice here before the auction as bonds discontinue the morning rally. Following the auction, renewed momentum in either direction is possible.

FNCL 4.5's have rallied from 101-14 to 101-23 trough to peak and continue to make new highs on the day. Similarly benchmark 10's are at their best yields of the day at 3.435 and through the pivot-based resistance at 3.452. The traditionally early lenders are already repricing and more may follow if current levels hold. If there is to be any concessionary set-up for the 1pm 2yr note auction, we have yet to see it.

Both MBS and Treasuries have rallied in the past 2 hours as they try to break definitively into Friday's trading range. For 10yr notes, 3.452 is the highest hourly closing yield from Friday and at 3.4536 currently, we're close to marking a similar yield in moments at the close of this hour. The corresponding level for MBS is the important technical level of 101-20. Closing this hour at or near those levels doesn't provide us much of an indication as to the prevailing trend for the day. Volume is low and the ultimate direction is more likely to be based on auction results.