MBS RECAP: Slow And Steady Won The Race

MBS Pricing Snapshot

Excerpts from the Beige Book:

(Prepared at the Federal Reserve Bank of Boston and based on information collected on or before August 20, 2012. This document summarizes comments received from business and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials. )

On mortgages:
" In the residential mortgage market, demand was described as stable to very strong, with a high percentage of applicants looking to refinance. Several bankers expressed concern about the low interest rate environment and compliance costs related to new regulations and their effect on profitability. We heard a few reports about a moderate loosening of lending guidelines."

On Housing:
"Reports from home-builders on single-family housing starts during July were mixed, although all of our contacts said that activity had improved compared to a year ago. Sales contracts were in all price-point categories. Homebuilders anticipate only a modest increase in the construction of single-family homes in the near term; however, opportunities for rehabilitating old buildings into apartments and constructing new apartments and special-needs housing are viewed as strong. Selling prices of new single-family homes were up slightly during the past six months, and rents increased in the low to mid-single digits. The volatility seen in building material prices over the past five months is beginning to subside, although there is still upward pressure on lumber prices. "

MBS and Treasuries both moved to their best levels of the day immediately following a relatively amazing 10yr Treasury Auction at 1pm Eastern. The auction garnered significantly lower-than-expected yields 1.70 vs 1.718 when-issued at 1pm) and higher-than-expected demand (Bid-to-Cover 3.26 vs 2.85 last time).

10's rallied quicker than MBS in the immediate wake of the auction, and although both have encountered some resistance, current levels in MBS are sufficient for positive reprices depending on the lender.

Trading continues to be quite light overall and bond markets continue looking for guidance wherever they can get it. Since just before 11:00am, the guidance looks to have come from equities in addition to a good technical bounce for 10yr yields at 1.748.

MBS have generally followed the move higher and Fannie 3.0s now sit at 104-29, unchanged vs yesterday's latest levels (November coupons).

The 10yr Treasury auction at 1pm is the next potential market mover (at least as far as scheduled events are concerned). Today's is the 2nd and final Re-opening of the record low 1.625 coupon awarded at the 8/8/12 Refunding. Brush up on "Treasury Auction Jargon" HERE.

Reopenings are generally stronger auctions than refundings, though this particular 1.625 coupon (the coupon is decided by the stopping yield at the Refunding auction) has been more problematic than most of the recent 10yr auctions. Only 3 times in the last 10 auctions has the stopping yield come in higher than expected and two of those three were the with this most recent vintage.

Markets will be expecting a bid-to-cover near 3.0, but we'd note the previous auction's BTC of 2.85 is a more informative benchmark than recent averages, which are pulled higher by the insanely strong auction on 7/11/12 which came in a whopping 3.61 BTC. More important than the cover will be the stopping yield relative to the expected yield (as determined by 1pm "when-issued").

For now, MBS moving into the green DOES introduce slight possibilities of positive reprices from a small group of lenders, but when we say small, we mean 1 or 2. Most would likely need to see additional gains coming out of the Auction for such possibilities to further develop.