MBS RECAP: 8/31/2011

We're expecting volume and directionality to pick up in September even though it hasn't been a characteristically "quiet summer." But that doesn't necessarily mean 9/1. Tomorrow offers up plenty of data though, including ISM Manufacturing at 10am. Joining the fun will be Jobless Claims at 830am, along with productivity and costs. Joining ISM at 10am will be Construction Spending. Other than Fed-Speak from Duke at 12noon, that's it for the economic calendar. Expecting more from Friday and NFP, although tomorrow could still be exciting. For full details see the following link.

As 10yr notes bounced at a technical level, moving from 2.17 to 2.1952 in fairly short order, MBS have weakened considerably. 4.0's just hit 103-22 and 3.5's hit 100-22, in line with the lows of the day. It's perfectly likely that these prices will be a cue for some support, but it's also possible they could create new motivation for a few lenders to reprice for the worse. If you already got one today, then you're probably not going to see one from the same lender.

104-04 to 103-20 was a sizable swing in Fannie 4.0 prices this morning (half a point!), especially for a time period of just over an hour. But since prices rebounded off those lows, the biggest swing in one direction or the other has been a mere 4 ticks (eighth of a point). Volatility in Treasury yields is similarly lower, not moving more than 2bps at a time and currently at a sort of equivocal 2.192 in 10's. In an almost flagrant display of technical trading, 10yr yields have been perfectly adhering to a triangle of narrowing yields since mid month extremes have come in from 2.34 (on 8/11) and 2.0 (on 8/18) to 2.28 and 2.14 recently. Those trends converge in the low 2.2's, although one of them is likely to be broken by the time markets react to Friday's NFP. The weakness we're seeing today falls within the realm of those converging trends (trading continues to occur "inside the triangle"). In fact, we're on the lower half of the triangle in terms of yields, so although it's not the most rate-sheet-friendly thing to say, in a way, it's OK to see MBS off their earlier highs because it means the market is still making sense in this technical context. Rallying further would have been "out of bounds." This sensible consolidation is ultimately a good thing for rate sheets because it has ushered MBS into a lower volatility afternoon, and in a broader context, is a better foundation for STABILITY at these prices. Only downside, is that stability will need to be confirmed by economic data, most importantly, Friday's NFP. Losses are limited in the meantime, 4.0's are down only 2 ticks at 103-26 and 3.5's down 4 ticks at 100-27. Recent ground-holding this afternoon appears helped by moderation in stocks, but we also hope and hold out possibility for a late round of month-end buying due to index extensions. Reprices for the worse came across as expected, but if stocks turn negative and/or index buying picks up, there's still possibility of late day improvements.

10's and MBS have rebounded from their earlier sell-off, which, in retrospect, looks like a mild test of a technical range. Indeed the 2.22 stopping point in 10yr notes saw TONS of action in much higher volume on Thursday and Friday last week and earlier in the month as well. Zooming out to 8/9 it's easy to see why (and we'll endeavor to post a chart of this later in the day). Among other things, 2.22 is the midpoint of the "triangle" of narrowing yields throughout the month. This suggests two other things as well: first, we'll probably see it again, soon. Secondly, being a "midpoint" we're likely to see yields break back above as well. But we'll dig deeper into that analysis when we have a chance to mark up some charts for you. For now, the important bit is that MBS are keeping pace with Treasuries nicely (not that it matters to pricing, but the higher end of the coupon stack is actually outperforming Treasuries as the fear of Government Refinance plans is reduced). 5.0's actually just ticked into the green. 4.0's are down only 2 ticks on the day now at 103-25 and 3.5's are down 5 ticks at 100-26. It's a bit of a grey area for reprices as some lenders may still have a "late-to-the-party" reprice for the worse, whereas it won't take much more time at current levels before some lenders who came out with pricing around 10am (or who were otherwise conservative) to be considering a reprice for the better.