MBS RECAP: Liquidity Dries Up Late, MBS Down But Not Out

By: Matthew Graham
MBS Live: MBS RECAP

While we could think of worse places to be than 102-21 in Fannie 3.5's versus 101-20 a week earlier, the afternoon weakness has still resulted in a few negative reprices.  If we're going to endure reprices and lower MBS, these are some of the most palatable conditions for such things as there has not been any major market event to cause the weakness.  Instead, it's more of an after-effect of earlier bid-side demand (mostly from hedge funds covering shorts) having left the building.  If these were the morning hours, there would probably be some other account types in play--longer term interests from Insurance/Pension funds and money managers, even the Fed--waiting to pick up the ball, but at this hour, we're always at more risk of putting up the dreaded "BID WANTED" sign.  Even so... the damage is minimal, and has mostly kept pace with Treasuries despite another day of hefty origination of new TBA MBS.  Things get more intense on the economic data front tomorrow, with GDP (Final), Corporate Profits, and Jobless Claims.  The afternoon's 7yr Note Auction is the last of the week.

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FNMA 3.5
102-21 : -0-07
FNMA 4.0
104-26 : -0-04
FNMA 4.5
106-12 : +0-00
FNMA 5.0
108-03 : +0-02
GNMA 3.5
104-05 : -0-08
GNMA 4.0
107-08 : -0-04
GNMA 4.5
108-27 : -0-02
GNMA 5.0
110-18 : +0-00
FHLMC 3.5
102-13 : -0-08
FHLMC 4.0
104-17 : -0-05
FHLMC 4.5
106-02 : -0-02
FHLMC 5.0
107-24 : -0-01
Pricing as of 4:08 PM EST
Afternoon Market Updates
A recap of MBS Market Updates provided by MND Analysts and streamed live to the MBS Live Dashboard.

Make sure you're signed up for Reprice Alerts to be notified by email or text the instant these are issued.  You can manage all MBS Live email and text notifications thru the 'My Alerts' menu option at the bottom of the dashboard or by clicking here.
3:41PM  :  ALERT: Support Breaking Down in Light Volume, Additional Reprice Risk
The most recent uptick in 10yr yields, despite occurring in "almost not enough to care" volume, broke the previously supportive ceiling for the afternoon, shifting the tone of the afternoon from "ground-holding" to something slightly less optimistic.

As long as 10's hold 2.20 or lower, it's not too troubling in the short term, and not-at-all troubling in the bigger picture, but MBS might be troubled enough to move below their 102-22 lows of the day in Fannie 3.5's. Even now, reprice risk feels a tad more elevated than it had been previously.

Nothing new here... no major drama.... just low volume leakage after hours, but such leakage has been known to increase reprice risks, even if it doesn't speak to broader trends.
1:27PM  :  Freddie Mac March Economic and Housing Market Outlook
Freddie Mac released today its U.S. Economic and Housing Market Outlook for March showing signs the housing market is awakening from its depression-like condition of the past few years and beginning, though slowly, to make a nascent recovery.

Outlook Highlights

* Stronger economic growth this year will translate into a further reduction in the unemployment rate below 8.3 percent.
* With stronger economic growth, home sales and originations forecasts have been revised upward.
* Expect 30-year fixed-rate mortgages to gradually increase throughout the year to about 4.5 percent.
* New rental construction for 2012 is likely to be the highest since 2005 if the current pace is maintained.
* Even with a 1 percent dip in new and existing homes sales in February, median sales prices moved up 0.3 percent on a year-over-year basis, a hint that home values may be stabilizing in more markets around the nation.
1:10PM  :  ALERT: Bond Markets Pare Some Gains Following 5 Yr Note Auction
The 5yr Note Auction stopped through 0.013% higher than the 1pm "when-issued" yield--effectively the estimated stopping yield. That's the first negative aspect of the auction. The 2nd came in the form of a lower than average bid-to-cover of 2.85 vs recent averages of of 3.02.

Although we'd give 5's some grace due to the recent rally setting fairly aggressive yields in the context of the past week of trading, the result is far enough off the mark to put some pressure on bond markets. 10's and MBS looked like they'd hold up at breakeven levels on the day, but just ticked into negative territory. Fannie 3.5's are down 2 ticks at 102-26 and 10's are up a bp at 2.196.

Granted, there could be more "knee-jerk" left to play out, but the current move creates growing risks of negative reprices.
12:35PM  :  5yr Auction Preview
As with many components of fixed-income markets, 5yr yields have been in a whole new world since the fateful August 2011 FOMC Announcement when the "2013 verbiage" made it's debut. Further improvements and the long sideways grind left 5yr Auction stopping yields under 0.94 since the November auction. Only after the most recent sell-off have yields returned to a 1+ handle, though they're nowhere close to the 1.580 which was the last auction before August FOMC. Here's a brief history of stopping yields.

2/22/12 = 0.900
1/25/12 = 0.899
12/20/11 = 0.880
11/22/11 = 0.937
10/26/11 = 1.055
9/28/11= 1.015
8/24/11 = 1.029
7/27/11= 1.580


When-issued yields are currently trading around 1.04, and in the context of these past results, current yields offer some solace that the recent rally (or correction if you like) won't necessarily make today's take-down an impossible task. At least we hope that it won't.

We also wonder how long the recent winning streak can continue for 5yr auctions... They've been stellar over this time, stopping through at lower than expected yields every single month since September. That's great, but seeing as how it's the longest winning streak on record, it begs the question as to how long it will last (especially considering that 5yr auctions have historically been weak in the month of March).

Recent average bid-to-cover is 3.02 for the last 3 auctions and was 2.89 on 2/22.
11:57AM  :  BofA CEO Strikes Optimistic Tone on Mortgage Exposure
(Reuters)Bank of America Corp's mortgage-related settlements cover a significant portion of the bank's potential losses, but the company still has more work to do, Chief Executive Brian Moynihan wrote in his annual letter to shareholders.

The second-largest U.S. bank has trailed its peers in recovering from the financial crisis because of losses and lawsuits tied to its 2008 acquisition of mortgage lender Countrywide Financial. In his letter, Moynihan strikes an optimistic tone, listing major settlements the bank has reached in an effort to limit its mortgage-related liabilities.

"Resolving these and other claims will take time, but we are moving through these issues aggressively and resolving them in the best interest of our shareholders -- settling when appropriate, and contesting them when we believe that is the right course," Moynihan wrote.

The letter was posted on the bank's web site on Wednesday as part of its 2011 annual report.
Featured Market Discussion
A recap of the featured comments from the Live Chat on the MBS Live Dashboard.
Andrew Peterson  :  "REPRICE: 3:48 PM - Interbank Worse"
Ira Selwin  :  "REPRICE: 3:05 PM - Franklin American Worse"
Steve Chizmadia  :  "REPRICE: 2:53 PM - Pinnacle Worse"
Victor Burek  :  "can they prove where the cash came from, like from selling a car?"
Matt Hodges  :  "perhaps a family member willing to gift some funds"
Matt Sullivan  :  "can they borrow the money from a family member and just pay them back with the cash...that way you could structure it as a gift?"
rford  :  "i have a borrower who has cash in a safe around $15,000. They will need to use this for a down payemnt. Other than waiting 3 months to season the funds after deposit, any ohter ideas to get this through u/w earlier?"
Andrew Peterson  :  "REPRICE: 1:35 PM - Interbank Worse"
Ira Selwin  :  "REPRICE: 12:04 PM - Franklin American Better"
Ira Selwin  :  "and so it begins..."
Matthew Graham  :  "I think the "first responders" could be in any time..."
Scott Valins  :  "approaching reprice levels, no?"
Ira Selwin  :  "and are negotiated as well."
Michael Francis  :  "Because of the government ownership of Fannie and Freddie, g-fees have not only gone up, but they vary from lender to lender a whole lot less than they used too...."
Michael Francis  :  "Traditionally, each lender had a different g-fee, and possibly a different buyup/buydown schedule as well, so yes it could vary by lender. The value of servicing, or specifically excess servicing, is also a driver. Each company looks at it differently, so you could see big differences from lender to lender as a result."
Matthew Graham  :  "Thanks for the confirmation Mike! G-Fee buyouts vary by lender based on multiples? "
Michael Francis  :  "MG - Yes. The 10bps Obama added to the g-fee certainly impacts the coupon, but if the base g-fee is 15, you add Obama's 10, and the minimum servicing of 25bps, you can still fit a 3.75% into a 3.50 MBS. Most likely, they now go into a 3%, and the 3.865% goes into the 3.5%, and that is why you see a big spread between the two rates."
Matthew Graham  :  "Mike, is that basically a confirmation that some lenders can make 3.75's happen in 3.5 pools still? This is something we've speculated on based on g-fee upfront buyouts and/or servicing costs, but haven't gotten any solid confirmation on. Definitely seems like "the drop" on rate sheets moved from 3.75 to 3.875 after the g-fee bump."
Michael Francis  :  "At the Fannie window, the spread between 3.625% and 3.875% is 1.95 The factors at work here, are the buyup/buydown rate applied by the agencies, and the spread between the 3% and the 3.5% MBS. 3.625% goes into a 3% coupon, with a buyup of the G-fee (or excess servicing). The 3.875% usually goes into a 3.5% coupon, with a buydown of the G-fee. In the case of Provident, they have sophisticated modeling, that looks at all the combinations of coupon, g-fee buy up or sown, and excess servicing val"