MBS RECAP: Gains Leaked

Although there were a few bill auctions today, the TSY auctions with which MBS markets are more concerned start happening with tomorrow's 1pm auction of 2yr notes. Even then, 5 and 7 yr notes on the next 2 days respectively are more germane to the MBS market, but 2's matter enough to have an impact. The reason 5's and 7's are more pertinent has to do with the duration of the average production MBS these days being much closer to that 5 to 7 year time-frame than 2 years. We'll also get New Home Sales tomorrow at 10am, but apart from the auction, tomorrow's most notable feature is the abundance of Fed Speakers. Thanks to the time zone differences between the US and Russia, Boston Fed Pres Rosengren will be speaking at 2am Eastern Time. We won't hold it against you if you don't get up for that one... The more reasonable time slots are occupied by Duke at 825am, Hoenig at 950am and Bullard at 120pm. To get a more detailed look at tomorrow as well as an overview of everything still to come this week, visit the following link.

It's a fairly rare occurrence to see lenders reprice for the worse on a drop from +6/32nds to +1/32nds day over day, but as we suggested might be the case, this has indeed been reported in small doses. The fact that FNCL 4.5's continue to hover around that 103-15 level and that benchmark guidance givers are well off their weakest levels of the day is a good sign that current losses are minimal and ongoing risks for additional reprices are slimming. That being said, know thy lender! If a particular lender tends to reprice later than the rest of the crowd, there's still a chance they've seen enough movement to do so, but simply haven't gotten around to it yet.

The University of Michigan survey of consumers shows that expected inflation has moved up noticeably over the past few months, raising concerns that we may be in for a period of rising inflation. However, the increase in expected inflation likely reflects the excess sensitivity of consumers to food and energy prices. Consistent with this hypothesis, household surveys have not forecast inflation well in recent years. This Economic Letter argues that the jump in household inflation expectations is a reaction to the recent energy and food price shocks, following a pattern observed after the oil and commodity price shocks in 2008. The data reveal that households are unusually sensitive to changes in these prices and tend to respond by revising their inflation expectations by more than historical relationships warrant. Since commodity price shocks have occurred relatively often in recent years, this excessive sensitivity has meant that household inflation expectations have performed quite badly as forecasts of future inflation. FULL ECON LETTER : This Economic Letter argues that the jump in household inflation expectations is a reaction to the recent energy and food price shocks, following a pattern observed after the oil and commodity price shocks in 2008. The data reveal that households are unusually sensitive to changes in these prices and tend to respond by revising their inflation expectations by more than historical relationships warrant. Since commodity price shocks have occurred relatively often in recent years, this excessive sensitivity has meant that household inflation expectations have performed quite badly as forecasts of future inflation.

Ginnie Mae has announced that additional data elements will be collected at issuance in order to provide more relevant information to the industry and investors. As a result, the electronic file layout for the RFS Issuer Monthly Report of Pool and Loan Data has been enhanced. Updates to the electronic file layout include the following changes: Seven new data elements on the Various Loan Record; and One new data element on the Loan Record. Appendix VI-19, RFS Issuer Monthly Report of Pool and Loan Data, includes the updated file layout and is currently posted under the “What’s New” section of Ginnie Mae’s website at www.ginniemae.gov. The updates to the RFS loan, and Various Record layouts are effective for the September 2011 Reporting Period (September 2011 activity reported in October 2011) and forward.

Although we haven't yet seen enough movement to fear any measure of widespread reprices for the worse, MBS have weakened enough that it wouldn't be out of the realm of possibility for a few of the early-to-act lenders may reprice for the worse soon. 10yr notes have broken over their previous technical support at 3.12 and stocks are rallying. FNCL 4.5's are at 103-15, which is still 1 tick up on the day. If we hold these levels or weaken further, additional lenders could reprice for the worse beyond merely the "early crowd."

While the day may not be average as far as levels are concerned (S&P at lowest point in over a month and TSYs near their best levels in almost 7 months), the volume and movements of prices and yields is all very ho-hum today. 10yr notes have been contained by a range of 3.095 to 3.118 and in average volume. Stocks are in the middle of their range as well with S&Ps near 1317, between lows around 1314 and highs just over 1319. There has been a small degree of correlation between stocks and bonds today and some recent rally momentum in the former threatens to push the latter toward its 3rd test of the 3.12. If that breaks and if MBS take another tick down, we may be looking at the early stage risks of reprices for the worse as that would put FNCL 4.5's at 103-15.

MBS prices have been losing altitude in regular doses so far this morning, with a series of successive "lower highs" moving down in one tick at a time from 103-21 to 103-18. They're currently back in line with their lowest level of the day at 103-16 as 10yr yields break just a bit higher than their worst level of the day. 10's are currently at 3.1176, up from opening levels in the mid 3.09's. In the bigger picture, TSYs can do just about anything up to 3.14 without affecting the intermediate range. FNCL 4.5's have a similar pivot point that coincides approximately with 103-13, making that a serious lock trigger for today (although even at 103-14/103-15 we'd be concerned about the faster-to-reprice group of lenders. A little silver lining for any potential weakness today is this: it's better set-up for this week's auction cycle. Coming into the week with a rally in TSYs does very little besides cause concern for sloppy auctions. If we back up closer to the 3.14 pivot, it should do at least something to make for a less cloudy assessment of how markets feel about these yields.