MBS RECAP: Holding As Much Ground As Possible Against Bond Market Losses

MBS Pricing Snapshot

Certainly "something" happened at 2:31pm that caused a big spike in futures volumes and a moderate spike in Treasury yields, but with no block trades being reported, we're not seeing clear causality. That said, MBS did chase the movement initially with 3.5's falling to their lows of the day breaking beneath 104-20 for the first time since 6/6. That was enough for at least one of the "early-to-act" lenders to reprice for the worse.

But now as we cross the 3pm Treasury close, we find Fannie 3.5's back at 104-21. 10's have bounced back slightly, but it's more of a "ground-holding" at the highs of the day than a pronounced turn-around. This puts the reprice outlook in a bit of a precarious position as it would be easier to assume more reprices were in tow if MBS were at the lows and falling or if Treasury cues looked increasingly ugly. The bottom line is probably that risk remains, but is somewhat less urgent than it might have been in the past half hour.

We'd keep an eye on 104-21 in Fannie 3.5s and if prices are below there and falling, risk is increasing. Treasury cues would come from crossing a line in the sand at 1.666. Bottom line, we might not be out of the woods yet, but the woods might not be totally as scary as they looked at first.

Seeing a BIG spike in Treasury futures volumes right now and 10yr futures moving lower in price, higher in yield. We don't know what's behind the move yet as it JUST happened, but fear some leakage into MBS. Thus this would be a super early reprice alert. It's fully possible that things bounce back and we end up with this being a non-event. But considering MBS are in line with their lows of the day and we're seeing unexplained sharp movement in TSY futures, we wanted to give you a heads up of potential further losses.

The 3yr Note auction normally isn't that much of a market mover though today's was apparently weak enough that we are seeing a bit of a reaction farther out the yield curve where 10's have retested their high yields of the day. But looks can be deceiving...

Although the movement in 10's does indeed follow closely on the heels of the 3yr auction, the auction itself is not the market mover here. It's effects on 10yr Treasury futures had come and gone by 1:07pm and were minimal if noticeable at all. 1:11 is when volume spikes occurred both in Treasuries AND equities (our first clue that we're dealing with something besides the 3yr auction considering stocks wouldn't normally move in concert with bonds just after an auction unless something else was motivating both).

At first glance, the only news we have hitting at the same time as the market movements is Mexico's Felipe Calderon saying he sees an "important advance on the question of Europe" at this weekend's G20 meeting.

10yr yields broke their highs of the day and MBS production coupons moved from their highs closer to their lows. This has only been about a 4 tick loss in 3.5's and 6 ticks in 3.0s, but considering the absence of earlier positive reprices, the distance between current levels and rate-sheets this morning is even smaller. So from a logical standpoint, we'd have to see MBS shed a few more ticks before negative reprices are justified.

It's been sort of an odd trading day so far... Volume was good overnight and we might even say it was strong in the first few hours of the domestic session. For instance, 10yr Futures saw 150k, 190, and 224k contracts traded in the hours ending at 9am, 10am, and 11am respectively. 560k contracts in the first 3 domestic hours of trading is above average, yet the movement associated with those hours has been surprisingly below average in terms of ground covered. There's clearly either a lot of push and pull on both sides of the bond market, a lot of indecision and hesitation ahead of the weekend's Greek elections and next week's FOMC, or some of all of the above.

MBS have responded by being even more narrow in range with Fannie 3.0's hovering within 3 ticks of 102-05 pretty much all morning. Fannie 3.5's have been centered on 104-25, ± 3 ticks. The economic data was passed over without so much as a disinterested 'hmmph...' and we find ourselves now continuing to drift sideways as lunch-time volumes set in, albeit closer to the highs of the morning's range than the lows. 3.5's are currently down 3 ticks on the day at 104-27 and 3.0's are down 6 ticks on the day at 102-08. 10yr yields are 4bps higher at 1.627, but had been as high as 1.647 earlier.

Wells Fargo Wholesale Lending will no longer accept non-Wells Fargo serviced FHA streamline refinance transactions. Wells Fargo is committed to helping borrowers nationwide with their mortgage financing needs, and this decision will help us accomplish that by focusing on borrowers in our existing servicing portfolio.

This policy applies to each of our origination channels across Wells Fargo Home Mortgage.

Wells Fargo Wholesale Lending will continue to accept FHA Regular Credit Qualifying Refinances including Rate and Term and Cash out Refinances provided they meet FHA’s definition of a Regular Credit Qualifying Refinance with an appraisal. This includes loans not currently serviced by Wells Fargo, and loans currently serviced by Wells Fargo.

Effective with registrations on or after June 19, 2012, Non-Wells Fargo serviced FHA streamline refinance transactions will not be accepted.