MBS RECAP: Late Day Liquidity Weighs on MBS

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Nothing too alarming going on here, but negative reprice risk is increasing slightly this afternoon as less liquid conditions after 3pm have sapped a modicum of demand for production MBS.

Although this sort of price action usually isn't indicative of the broader trends, lenders occasionally reprice late in the day because of it. Fannie 3.5's are only down to 102-08+ at the moment, but that's a decent enough clip from the 102-15+ highs to raise the alert level just a bit into the last two hours of the day.

Ostensibly conflicting messages from Fed speakers... What's with that?! Mixed signals from the FOMC can cause volatility, and mortgage rates are not fans of volatility in underlying markets.

When Dallas Fed Pres Fisher (non-voter) says stuff like: "We will not support further quantitative easing under these circumstances because there's a lot of money lying on the sidelines, lying fallow," and "I don't see what more would do," you have to wonder if he's purposely trying to avoid tuning in to Bernanke's messages from earlier this week.

At the first George Washington University lecture, Bernanke gave a history lesson, citing the failures of the central bank in the 1930's that ultimately resulted in a major aftershock to the initial market crash preceding the Great Depression.

Bernanke said the Fed "did not use monetary policy to prevent deflation and the collapse in output and employment,” and “did not adequately perform its function as lender of last resort, allowing many bank failures and a resulting contraction in credit," concluding, "We will want to keep these lessons in mind as we consider the Fed’s response to the crisis of 2008-2009.”

In short, Bernanke doesn't necessarily disagree with the more hawkish Fed members on whether or not MORE QE is NEEDED (assuming economic metrics continue to hold or improve), but perhaps some of the more hawkish Fed members should do more to at least acknowledge that there's an argument to be careful about pulling back too quickly that goes beyond the simple question of whether or not the economy is improving.

Although growth is "slower than we would like," Dallas Fed President Richard Fisher told Fox Business Network, "it's gaining momentum."

"We will not support further quantitative easing under these circumstances because there's a lot of money lying on the sidelines, lying fallow," he said according to a transcript provided by the network. "We don't need any more monetary morphine." "The real problem in our country is job creation and prosperity," he said. "And we need to get better fiscal policy to complement what we at the Fed have done, because it's not working as effectively as it should."

With rates near zero, pushing borrowing costs lower simply will not create more jobs, Fisher said.

"I don't see what more would do," Fisher said. "And I especially could not justify it if the economy continues to improve along the path which has been indicated recently."

(Reuters) - U.S. consumer spending is still too weak to ensure a satisfactory rate of economic growth, Federal Reserve Chairman Ben Bernanke said on Thursday.

"Right now, in terms of debt and consumption, we're still way low relative to the pattern before the crisis," Bernanke told students in the second of two lectures at The George Washington University. "We lack a source of demand to keep the economy growing."

Earlier in the day, 10yr yields tested a break below the mid 2.25's, but have since drifted calmly higher to sit at 2.2727 at the moment. Depending on which analytic method you fancy today, those "mid 2.25's" could either be viewed as resistance from the 200-day moving average (broken on 3/14 and confirmed on 3/15), or a return to a small band of yield from 2.26-2.29 that acted as a high volume pivot on the same days. Bottom line: things are calm...

MBS appreciated the stability, and did a slightly better job than 10's of holding their technical support at 102-10, which was yesterday afternoon's most frequent high, and has been support since 11am today. But we’ve just ticked to 102-09 for the first time today and that raises a concern for lenders who priced between 9:30and 9:45am eastern time, or any later sheets at 11am eastern time. MBS were at their highs at those times and are 4-6 ticks weaker at the moment. Negative reprice potential is slightly greater with a test of 102-10 among those lenders.

From a technical standpoint, we'd keep an eye on 102-10, which is where Fannie 3.5's currently trade. If we're there or above, we'd remain relatively unconcerned about negative reprice potential. The more we trade below, the greater the risks of negative reprice, but we’d also reiterate that the trading has just been incredibly calm today, and we haven’t seen anything too shocking or disturbing in the price action as far as it would speak to broader trends. Today has been very contained and surprisingly uneventful in the recent context.

It would seem that traders or algorithms (or both) are either cognizant of the 200-day moving average at 2.255 or at least have coincidentally traded it as resistance so far this morning. Just after 8am, just after 9:30, and just after 10:30, we have three noticeable bounces, followed by our first test lower heading into the 11am hour.

Just as we're hypothesizing about cognizance of that moving average, so too should we be cognizant of the impending completion of the Fed's scheduled Twist buying in the 2022-2030 maturity range as something that could cause a bit of volatility in coming minutes.

MBS are near their highs of the day with Fannie 3.5's up 7 ticks at 102-15. If the reaction to the Fed buying helps 10's break lower, we'd likely see MBS hit new highs.