MBS RECAP: Late Day Weakness

Homeowners living in Cameron, Orleans, Plaquemines, and St. Bernard Parishes may be eligible for additional compensation under the Louisiana’s Road Home Program under the terms of a settlement agreement announced today by the U.S. Department of Housing and Urban Development (HUD), the State of Louisiana and plaintiffs in a federal housing discrimination lawsuit. “This agreement is a huge help to families who clearly want to get back into in their homes but continue to struggle to make the needed repairs to their properties,” said HUD Secretary Shaun Donovan. “While this additional compensation goes a long way to helping folks complete their recovery, we’re also going to make sure that those who left their blighted properties behind are held accountable.” Louisiana Commissioner of Administration Paul Rainwater said, “Our goal in Louisiana has always been to provide the resources necessary to allow residents impacted by Hurricanes Katrina and Rita to return home, regardless of race or status. We recognize that many households face remaining challenges in their rebuilding efforts and we are hopeful that additional assistance through our Blight Reduction Grant Adjustment and other rebuilding programs will help bring even more Louisiana families home. I am glad that we will be able to close this chapter of the Road Home and to move forward.” “Regrettably, the Road Home program became a road block for many.” said James Perry, Executive Director of the Greater New Orleans Fair Housing Action Center. “This settlement is a step in the right direction toward getting more hurricane-affected homeowners back into their homes and making good on America’s promise to build a better New Orleans in a way that is fair and equitable for all people regardless of their race.”

While this isn't necessarily an alert that you're LIKELY to receive reprices for the better, you're at least no longer as likely to receive reprices for the worse (unless the lender's watch is broken or the decision is unrelated to MBS movements). Some lenders who had previously repriced for the worse may now consider giving that rebate back as the afternoon MBS rally has steadily and calmly brought prices of Fannie 4.0's back to their morning levels (currently 3/32nds up on the day at 100-09). Conceivably, a lender who priced conservatively this morning MIGHT reprice for the better as well, but we'd stress the "might," and reiterate the fact that MBS are only back to the earlier range, with no breaks into higher territory.

In our earlier RATES TECHS post, we already laid out the quantitative case for MBS being "stuck in the middle." This is just an ideological road to the same conclusion. The ground lost on earlier headlines out of Europe gave the bond market a chance to show its resolve to hold relatively steady and sideways ahead of NFP. After losing just enough ground (sadly) for a few reprices for the worse, MBS and Treasuries quickly and decisively regained their footing, and at technically pertinent levels as well. If we are indeed witnessing a circling of the wagons ahead of Friday's jobs data (that is to say that bonds seem to have shaken off a temporary market mover in order to get back to being "decidedly undecided" about the bigger picture), then we SHOULD continue to see a moderate amount of volatility contained within a sideways range for the rest of today and tomorrow. Without predicting with certainty how wide the volatility might nudge the range, it does appear to be centered on 3.10 today (or in the process of pivoting around 3.10). Fannie 4.0's are back in the green, 2/32nds up on the day at 100-08. Lenders who decided to reprice when that figure was 100-03 may have to consider reprices for the better if current levels hold or improve.

Production MBS coupon prices have fallen far enough to be concerned about reprices for the worse. The Fannie Mae 4.0 is currently -2/32 at 100-04 after trading as high as 100-12 this morning. Rate sheets are all over the place following a long holiday weekend so some lenders may be slower to recall than others. This alert is based purely on the negative change of price direction (thx to a bounce in stocks)

This mornings movement in the bond market, when taken into consideration with the uptick in volume versus yesterday, paints a fairly clear picture. After the harrying hours spent testing some of the worst levels since early May, both MBS and Treasuries calmly marched back toward long term crossroads. Would this have occurred without Portugal and Greece in the news? It's hard to say for sure, but we'd wager that bigger picture quantitative considerations continue to underpin the appearance of a headline-driven market. Due to varying spread levels between MBS and Treasuries, it's always easier and more valid to discuss "big picture" in terms of the benchmark--in this case, 10yr Treasury yields. Those yields have been consistently reinforcing a level near 3.10 as the most important inflection point on the high side of the market over the past two months. After rising into the 3.2's last week, the market has promptly corrected back down to 3.10 neighborhoods this week. Today fits into this picture well. Today we see the remnants of the directional rally that brought MBS prices higher and Treasury yields lower SHIFTING out of that short directional phase and potentially settling into a sideways holding pattern. Why go into a holding pattern near longer term crossroads levels? You may already have guessed the answer: Friday's NFP. 3.10 (and thereabouts) is the best candidate for a neutral territory where bulls and bears can meet to digest the upcoming significance of Friday's jobs data. If the data makes a solid suggestion in one direction or the other, 3.10 will become less of a middle ground and more of a level to be watched for resistance or support going forward. Specific to today, Fannie Mae 4.0 MBS have been in a narrow range between 100-07 and 100-11 with two clear bounces at both those highs and lows. That speaks to the "sideways" aspect adopted by bond markets this morning after exhibiting a decided bias to rally off recent weak points.