Lots of New MBS Originations Today as Bond Markets Trade Slightly Weaker
This morning's live alert on the MBS Dashboard:
MBS Open Slightly Lower. No Major Drama This AM. Waiting on FOMC - 9:01 AM:
Yesterday's rally combined with some correction for the buying focus from Monday (month-end buying) introduced a selling bias in bond markets. That was mostly imperceptible in yesterday's price action, but as far as warm bodies, there were 3 sellers for every 2 buyers in the long end.
Things weakened for bonds, almost 100% in concert with things strengthening in stocks--a solid suggestion that "risk-on" is merely taking back a nominal bit of ground from the "risk-off" sentiment that pervaded yesterday's session. But with 10yr yields still under 2.05 and Fannie 3.5's at 102-01, the broader shift in favor of "risk-off" definitely remains.
With production MBS down only a quarter of a point at the moment and benchmark TSYs holding their ground, the damage to rate sheets this morning should be contained, but can vary due to pipeline control considerations depending on the lender.
As long as EU tape bombs stay at bay, the FOMC announcement should be the highlight of the day. Don't forget that today is one of the press conference days so the announcement itself will be at 12:30 with the press conference at 2:15pm.
----
It's been almost 2 hours since that alert and not much has changed. Stocks and bond yields are staying fairly strongly connected (not much economic data to trade, and uncertainty in heavy supply):
10yr yields are still about 5 bps higher on the day, but are trading well under what HAD BEEN a tough floor to break around 2.125. Yield movements have been a bit noisy in that range, but anywhere from 2.109 to 2.13 would likely give pause to a sell-off if we see such a thing occur today (teal line below). The "expanding cone" of volatility seen in the chart below suggest markets could go either way.
Here's a closer look at how that cone plays out of the last two days:
The shape of trading in MBS is slightly different. In the case of Fannie 3.5's, we see a clear pivot point acting as support yesterday and resistance today, and then a trendline coming off the lows this morning to form a "triangle" with the horizontal pivot point. The 102-06+ level seen in the chart will probably win this fight...
Video Provided by MBS Live!
While we're on the topic of the different shapes of trading between MBS and TSYs let's talk about SPREAD and NEW MBS ORIGINATION for a moment. As you might know, when bond markets are weaker or weakening, "spread products" (securities that are valued, at least in part, relative to the yield of a similar security) such as MBS tend to LOSE LESS than Risk-Free Treasuries. You could even think of this as simply as that! Treasuries = risk-free (essentially, depends on who you ask I guess, but stay with me here!) and MBS = slightly more risk, but still in the general realm of LOW RISK. So when markets shift as they have today from more of "RISK OFF!" trade yesterday to accept more risk today, the riskier quadrants, like stocks, are the biggest beneficiaries. Their prices actually go UP. And MBS benefit in weird sort of way simply by seeing their prices "not go down as fast" as Treasuries.
Hopefully that makes sense, and here's how it plays into the "origination" topic. The text embedded in the following chart explains most of it, but essentially, the higher that line is, the wider the spread between MBS yields and TSY yields, and the more valuable MBS would be to an investor vs TSYs. This gives banks and lenders who are waiting to take your recently locked loans to market (in the form of New MBS Originations) an opportunity to "sell sell sell" while demand for the Spread Product (again, that's MBS!) is HIGHER than it otherwise would be. It's all about EQUILIBRIUM, or at least it's about TRYING to MAINTAIN it. in the chart, you can see spreads start to fall, prompting lenders to offload MBS so that prices don't get too high vs Treasuries that investors might shy away from MBS. Bottom lines are twofold: A) demand is naturally higher for spread product on weak bond market days and B) Its a good opportunity for lenders to empty the ballast while at the same time keeping spreads from tightening too quickly.