MBS MID-DAY: 8/8/2011

By: Matthew Graham
MBSonMND: MBS MID-DAY
Open MBSonMND Dashboard
FNMA 3.5
99-28 : +0-27
FNMA 4.0
102-31 : +0-15
FNMA 4.5
105-10 : +0-11
FNMA 5.0
107-13 : +0-08
GNMA 3.5
101-09 : +0-29
GNMA 4.0
104-20 : +0-18
GNMA 4.5
107-10 : +0-10
GNMA 5.0
109-12 : +0-06
FHLMC 3.5
99-26 : +0-28
FHLMC 4.0
102-32 : +0-18
FHLMC 4.5
105-09 : +0-12
FHLMC 5.0
107-08 : +0-08
Pricing as of 11:03 AM EST
Morning Market Updates
A recap of MBS Market Updates provided by MND Analysts and streamed live to the MBSonMND Dashboard .
10:04AM  :  MBS and TSYs Perk up on Lackluster Stock Market Open
Ranges had been fairly tight and contained until the domestic stock markets opened. It's not like the things hadn't already been trading in futures, but regardless of S&P downgrades, it's common to see bonds trading with a bit of reservation ahead of stock's cash market open. The gains weren't an immediate "9:30 AM Thing," but rather came into the picture right as stocks turned negative, sort of giving us a clue that bonds are watching and responsive. The improvements took 10 yr notes down into the 2.43's and Fannie 4.0's are up 15 ticks on the day now to 102-31, basically in the middle of Friday's pre-noon range (mean and median based on eyeball calculations). With the previous caveats about lender response to uncertainty/volatility, this is a net positive for rate sheets, though could increase the delay since it's a relatively spiky movement in the context of the more narrow morning.
9:27AM  :  New MBS Commentary Post
9:10AM  :  ALERT: S&P Downgrade. No Econ Data. Biggest Loser. EU. Risk-Off
The S&P downgrade is an x-factor that adding more volume and volatility to today’s economic-data-free trading. The short term effects may be a surprise to some. The same debt that was downgraded is rallying. 10yr notes are up 21 ticks in price, down 7.2bps in yield to 2.4904. Counterintuitive perhaps, but the justifications for it have been making rounds for weeks. Those can mostly be distilled into three key components. 1) Even at AA+, is there better safe haven than US TSY'S? Especially with #2? 2) European debt contagion is more important to TSY trading than the fallout from the downgrade. It’s very huge and very ugly. (Think 3% + yields in the absence of EU Drama). 3) The Biggest Loser here is Stocks, giving TSYs even more of a lift. Whatever yield hike you want to talk about as a result of the downgrade, by the time you balance it with the yield drop in response to those two factors, you're looking at a fairly nominal reality with 10yr notes not as low as they were early Friday morning, but neither are they as high as they were on Friday Afternoon. Right about mid-range. The frustrating thing in the short term pertains to the "safe haven" concept, the seeking of which sometimes explained as "risk-off." Sadly, MBS are more risky than TSYs. Sad for today anyway where risk is noticeably out of style. So versus the 20+ ticks of price gains in 10's, Fannie 4.0s are up only 5 ticks at 102-22. The underperformance of MBS is to-be-expected this morning, and should be progressively less severe moving forward. If lenders price rate sheets exclusively based on MBS levels, things could be OK or even slightly improved this morning. If lenders go an extra step or two and pay attention to the volatility and uncertainty, rate sheets could be worse. The bottom line, one with which we'll have to become rapidly comfortable, is that it's a "wait and see" environment for now, but at least the seats are less painful than many had feared.
Featured Market Discussion
A recap of the featured comments from the Live Discussion on the MBSonMND Dashboard .
Matthew Graham  :  "The important thing is that MBS and rate sheets don't like volatility"
Matthew Graham  :  "in short, when you hear talk of "vols" in any of the aforementioned disguises, the higher the vols, the shakier the footing for MBS staying tight to Treasuries and the shakier the footing for lender pricing staying tight to MBS"
Matthew Graham  :  "You might hear us discuss "implied volatility" (or "implied vols" or "vols" or "ATM Implied Vols" or "BP vols".... all different ways of getting to the same concept)"
Brett Boyke  :  "just got our agency direct pricing from our secondary, only .16 better to start at 4.375 and flat at 4.25"
Matthew Graham  :  "5.5's down a tick, 3.5's up 27"
Matthew Graham  :  "down-in-coupon already on your screens"
Matthew Graham  :  "but the gapping out began on friday well before S&P news"
Matthew Graham  :  "more than half a point higher at these tsy lows on Friday"
Matthew Graham  :  "MBS underperformance much more significant now"
Sam  :  "down in coupon MG or too early to confirm?"
Scott Valins  :  "MBS pricing when TSY was 2.4 on Friday? Major lag no?"
Matthew Graham  :  "interesting that this immediately follows stocks breaking their Friday lows"
Matthew Graham  :  "10yr notes now matching Friday AM yield lows"
Matthew Graham  :  "benefits tsy's more than MBS in that regard"
Matthew Graham  :  "indirectly, it broadly increases "risk-off" sentiment--drives it further to one side of the spectrum"
Matthew Graham  :  "credit downgrade doesn't directly affect MBS"
Andrew Russell  :  "and you are saying it will have no effect on MBS, why do I even watch Sqwack?"
Andrew Russell  :  "CNBC was saying, reporter wise, how a fannie and freddie down grade could mean rates rise instantly..."
Matthew Graham  :  "MBS is not rated, but the conservatorship means the "full faith and credit of US gov" in the roundabout explicit guarantee is now "full faith and full AA+ credit""
John Rodgers  :  "S&P is way behind my ratings. I've downgraded the entire world. "
Jeff Anderson  :  "CNBC said that S&P could downgrade Fannie & Freddie today. I thought that was implied by Friday's downgrade of the US. Aren't they lumped together these days?"
Ken Crute  :  ""I mean I think S&P has shown really terrible judgment and they've handled themselves very poorly,". "And they've shown a stunning lack of knowledge about basic U.S. fiscal budget math. And I think they drew exactly the wrong conclusion from this budget agreement.” Treasury Secretary Timothy Geithner told NBC/CNBC News. ….. Hello Pot, this is the Kettle calling…….."
Christopher Stevens  :  "I like this quote...Bill O'Donnell and John Briggs, bond strategists at RBS Securities, wrote in a note. "Trying to assess how much of a 'rate penalty' will be placed on Treasury debt is silly and should be left for historians looking back at this event. I have heard many say that the downgrade and split rating could cost the Treasury 20 basis points. Well, if stocks go down 500 points today then Treasury 10-year notes rally to 2.30% instead of 2.10%.""