MBS RECAP: Record Prices Meet Pipeline Management

BE AWARE (if you're not painfully aware already), it is a fact of life today that you will see lenders reprice for the worse despite healthy MBS prices, simply to control inbound lock volume. You’re entering uncharted waters. There’s no basis for bond math (quant valuations) right now. The market is sorta flying blind…. No guarantees what you're looking at now will be available in five minutes regardless of what MBS prices do. In fact, pipeline control is the dominant pricing consideration in the market today, unless MBS rise or fall a solid half point.

A bit more on tap tomorrow in terms of scheduled economic data. Import/Exports will print at 830am along with Jobless Claims. It should be interesting to see how much of an impact domestic economic data will have in light of the recent FOMC announcement and ongoing "euro-drama." At 1pm, the 30yr bond auction marks the last of the week. To see the economic forecasts for the data as well as other relevant considerations for the entire week, check the following link:
http://www.mortgagenewsdaily.com/mortgage_rates/blog/223638.aspx

Into the official 3pm bond market close, MBS and TSYs regained some recent losses to cross the 3pm mark in the middle of today's ranges. 10's are currently at 2.15 and Fannie 4.0's are up 27 ticks at 104-17. Fannie 3.5's which are beginning to see some action (due to rate locks at 4.125% note rates and lower), are up 24 ticks at 101-22. These are the all time closing highs for both coupons. Pricing continues to be disconnected from MBS though... Lender pipeline control reigns supreme and continues to frustrate. Volumes all over have been huge. 10yr contracts were approaching 1.9 million at 3pm. close to record levels.

Today's most recent look at the Treasury Budget shows the overall deficit at $129.4 bln vs $165 bln a year ago for the month of July. This brings the deficit for the entire 2011 Fiscal Year down from $1.17 trln to $1.1 trln. Receipts rose from $156 bln to $159 bln and outlays fell from $321 bln to $288 bln.

Versus it's own recent track record and given the current market levels, the 10yr Auction was absolutely beyond expectation. The bid-to-cover was in line with the highest recent averages at 3.22. The high yield stopped more than FOUR BASIS POINTS LOWER than the 1:01pm When-Issued yields (When-Issued or "WI" can be thought of as the market's running estimate of where that high yield will come in). Direct Bidders (which include primary dealers and other mostly domestic accounts who can bid directly at auction without having to go through an intermediary) pressed the buy button so aggressively that fingers are broken and keyboards lay smoldering in ruin. They took OVER 30% of the auction versus an average of less than 10%! (Think of direct bidders like the bigger kids in line pushing ahead of Indirect bidders). The market reaction is understandably subdued given our nearness to all time lows and the fact that extent of the current flight-to-safety makes good demand somewhat of a given. CNBC's Liesman equates it selling water in the desert, and while that sounds pretty good in retrospect, you gotta wonder why all the traders in WI had the thing at 2.181% if it was such a "given." Either way, the auction amounts to CONFIRMATION of recent movement. Not ultimate, enduring confirmation, but to some extent, evidence that "low 2's" are where the long end of the curve wants to be right now. Fannie 4.0's are up 28 ticks on the day at 104-18, but there's not much rhyme or reason to lender pricing's connection to MBS today.