MBS RECAP: More Gains, Still Stymied By Resistance

By: Matthew Graham
MBS Live: MBS RECAP

MBS had a good day heading into the 7yr auction after getting a lift from this morning's uneventful GDP and big upward revision in Jobless Claims. Things further improved after the auction, but the 102-30 pivot point in Fannie 3.5's remains in play. We traded over it several times today, but there's been no convincing break higher...No follow-through. It was the same story with 10yr yields today. While they had a great day in terms of trading to lower yields, they hit the 3pm close, and are going out slightly HIGHER than their initial rally levels following AM data! Now... Of course we'd love to see bond markets follow through on both of these rallies and crush these respective resistance levels tomorrow, but from a technical standpoint, the lack of positive trade facilitation beyond this resistance has us cautious heading into tomorrow.

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FNMA 3.5
102-31 : +0-10
FNMA 4.0
105-00 : +0-06
FNMA 4.5
106-16 : +0-05
FNMA 5.0
108-05 : +0-03
GNMA 3.5
104-13 : +0-09
GNMA 4.0
107-14 : +0-07
GNMA 4.5
108-30 : +0-04
GNMA 5.0
110-18 : +0-00
FHLMC 3.5
102-23 : +0-09
FHLMC 4.0
104-22 : +0-06
FHLMC 4.5
106-05 : +0-04
FHLMC 5.0
107-25 : +0-01
Pricing as of 4:07 PM EST
Afternoon Market Updates
A recap of MBS Market Updates provided by MND Analysts and streamed live to the MBS Live Dashboard.

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3:59PM  :  HUD Withdraws FHA Approval For 'AmericaHomeKey'
The U.S. Department of Housing and Urban Development’s Mortgagee Review Board (MRB) today announced that it is immediately and permanently withdrawing approval for AmericaHomeKey, Inc. (AHK) to originate and underwrite new mortgages insured by the Federal Housing Administration (FHA). In addition, the MRB is imposing $268,000 in penalties against the Dallas-based mortgage lender for repeated and serious violations of FHA requirements.

“When we begin to see a pattern of failure to apply our standards, we will act to protect FHA’s financial health as well as consumers,” said Acting FHA Commissioner Carol Galante. “We expect lenders to meet our requirements, not just to protect the safety of our insurance fund but to make certain they don’t set up borrowers to fail by putting them into mortgages they ultimately can’t sustain.”
1:16PM  :  ALERT: 7yr Auction Only So-So... Initial Reaction is Positive Nonetheless
Despite coming in at a weaker than-average bid-to-cover of 2.72 (vs. average of 2.93), the 7yr Note Auction was just about dead-on with 1pm "when-issued" yields (1.590 auction vs 1.589 when-issued) suggesting that markets were in an ideal position leading up to the result.

We wouldn't normally see bond markets rally after such an auction, but there are a few factors contributing to it:

A) we sold-off a bit heading into the auction
B) 7yr Auctions are a bit tougher than the rest
C) It's the last auction of the week

All of the above had the potential to release a little pent-up relief bid and so far, appears to be doing just that. While we'll always have to keep the caveat out there of "it's still a bit early to say conclusively," the reaction is favorable for now. MBS are at their highs of the day at 102-31 and 10yr yields, while not at their lows of the day, are back down from just over 2.18 to 2.164. The conclusion is "little to no risk of negative reprices at the moment," although positive reprices might like to see more time spent trading these MBS highs before they become increasingly likely. Benchmark 10's really need to break and hold below their pre-auction pivot at 2.1623 for that to happen.
1:00PM  :  ALERT: Fed's Plosser Out Early, Moving Markets Ahead of Auction
Philadelphia Fed President Charles Plosser, scheduled to speak at 1pm, was out early, saying such things as

- may need to raise rates before late 2014
- fed should rethink stance if conditions worsen
- reiterated upside inflation risks
- and the biggie: "we should not anticipate additional accommodation.

This gave markets a little jolt, or so it would seem, with 10yr yields moving from mid 2.16's to 2.18. But we're reluctant to simply be satisfied with that causality as the stock market has followed bond yields higher--something it shouldn't probably do as a result of more QE being dismissed.

Either way, bond markets are under just a bit of pressure here ahead of the impending 7yr auction results, but after a brief dip lower, MBS continue at the 102-26 support and look to hold it for the next 60 seconds before the auction.
12:53PM  :  7 Yr Treasury Note Auction Preview
The last 7yr note auction on 2/23 was triumphant, with a 3.11 bid-to-cover and stopping through 2.5bps lower than the expected yield ("lower than expected" = auction's awarded 'high yield' versus 1pm 'when-issued' yield). The two auctions before that were less stellar, with 2.73 and 2.68 BTC's respectively, and both just over 1bp higher than expected in yield. Rounding out the previous 4 examples, November's auction was almost a carbon copy of February's, 2.5bps lower than expected and a 3.20 bid-to-cover.

This leaves the average bid-to-cover over the last 4 auctions at 2.93. The high yields from most recent have been 1.418, 1.359, 1.430, and 1.415, for an average of 1.406.

As always, the market reaction that follows the last auction of the week isn't always directly correlated to the auction results. Some latent trading ideas might be on hold from yesterday's auction, simply waiting to be sure that today's 7yr doesn't make them seem like bad ideas. In that sense, the evolving momentum just after 1:01:30 pm will be as informative as the results themselves, although we'd tend to view any "better-than-average" result as being good enough to elicit any relief bid, which might be on hold after yesterday's rather lackluster 5yr auction.
Featured Market Discussion
A recap of the featured comments from the Live Chat on the MBS Live Dashboard.
Victor Burek  :  "REPRICE: 4:00 PM - Nexbank Better"
Aaron Buyside Meyer  :  "page 398 of the Feb ed. of the seller guide says a loan over 80% LTV 1 unit primary a min borrower contribution from the borrower's own funds is NOT required. All funds canc ome from a gift. page 398"
Eric Franson  :  "REPRICE: 2:17 PM - Wells Fargo Better"
John McClellan  :  "BUT ...fannie requires 5% of borrowers own funds for LTVs greater than 80%"
Aaron Buyside Meyer  :  "United Guaranty wlil allow the gift of 5% and loan at 95%"
Mike Drews  :  "also have to be able to find MI for it:)"
Bryce Schetselaar  :  "Interesting...my go to lender has an overlay apparently. Do you guys know of any investors withouttheoverlay?"
Sung Kim  :  "it is investor dependent, but that is why fannie no longer messages for that"
Sung Kim  :  "min. contribution is no longer a requirement by fannie"
Bryce Schetselaar  :  "Are there any lenders out there that will allow gift funds to be part of the 5% down on a conventional? Maybe a portfolio product?"
Matthew Graham  :  "from a pure trading standpoint, you'd do this on the first major pull-back. If that happens during MBS trading hours, great. Otherwise, the overnight uncertainty is a pretty big consideration "
Matthew Graham  :  "Could 10's make a play at 2.13 or 2.10 tomorrow, resulting in MBS breaking into 103's? totally possible, but the risk of a bounce-back should be weighed not only on the individual deal as it pertains to client preferences, but on overall pipeline strategy as well. Certainly, if I'd been floating something since the high 101's, I'd be looking for a lock opportunity near 103-00"
Brent Borcherding  :  "Looks like you're safe for now...I'd wait to see how the rest of the day shapes out and if there is more improvement...you decide either way with that."
Matthew Graham  :  "Either way, you know you're waiting until lock cut off."
Moshe Berg  :  "so lock after the reprice or wait for tmorrow?"
Bill Laffey  :  "REPRICE: 1:33 PM - Provident Funding Better"
Nate Colwell  :  "REPRICE: 1:29 PM - Franklin American Better"
Tony Cardinal  :  "O/u on 2pm reprice; what's the verdict?"
Chris Kopec  :  "Post auction relief..."
Matthew Graham  :  "bond markets look to be holding their ground at the moment, too soon to know how it will play out for sure"
Matthew Graham  :  "also have an eye on 2.18's in 10yr yields"
Matthew Graham  :  "if 102-27, I probably wouldn't be locking yet."