MBS RECAP: Another Tough Day For Mortgages

MBS Pricing Snapshot

MBS continue to diverge from broader bond markets as 10yr yields are actually edging into positive territory at the moment while Fannie 3.0s are close to their lows of the day, down 6 ticks at 104-23.

Even though MBS traded at lower levels earlier this morning, the trend toward weakness in spite of relative stability in bond markets is starting to become a real concern. It could be enough of a concern to increase the chances of negative reprices among some lenders, though we'd note that rate sheets were already fairly conservative today relative to the change in MBS prices.

Because of that, we're once again in a situation where reprice risk is hard to gauge. On the surface, we're no weaker than we were this morning, but if we don't bounce higher, quickly, the ugliness of the trend may be enough to do the trick.

Highlights from Minutes of the most recent FOMC Meeting on October 23-24

• A number of participants in FED'S October meeting thought more asset buys would likely needed after operation twist ends--FOMC minutes
• Several FOMC participants questioned effectiveness of asset purchases or whether more purchases warranted if moderate growth sustained
• FOMC participants generally favored use of economic thresholds to replace calendar date in forward guidance-minutes
• Participants offered differing views on whether quantitative or qualitative thresholds would be most effective-minutes
• FED policymakers generally thought QE3 had produced a marked easing in financial conditions-minutes
• Many FED policymakers saw uncertainty over us fiscal cliff and Europe restraining U.S. growth in coming months-minutes
• Minutes say many FED business contacts said they were delaying hiring and spending because of Fiscal Cliff
• A few FOMC participants indicated low rates could increase demand for risky assets that could lead to imprudent risk taking
• Many members of policy committee saw fed forward guidance on interest rates as effective tactic-minutes
• FED explored consensus forecasts based on individual policymaker views, but most felt it would be difficult to agree-minutes

As we mentioned in the morning alert, the business of assessing reprice risk on days like today is a bit tricky as it will depend heavily on the time of day that a particular lender released their first rate sheet. Some lenders are already facing prices in Fannie 3.0s that are more than 4 ticks weaker than rate sheet time, which we normally view as increasing the risks of negative reprices.

Stocks and bonds are showing a strong connection at the moment as the whole concept of "risk on" vs "risk off" moves in unison. Perhaps markets are so intently focused on the Fiscal cliff issues that we're waiting for anything meaningful to be divulged at the president's press conference later today, or maybe it's a complete non-issue.

Either way, Fannie 3.0 MBS are down to 104-26 after getting within half a tick of 105-00 roughly an hour ago. We're still not back to the earlier lows of the day, but are more than halfway there. Again, lender specifics will trump the general analysis, but generally speaking, we'd guess that these losses don't yet connote any sort of extreme reprice risks, though a few lenders could be close. We'd also note that it's not a runaway sell-off in mega high volume either--one potential saving grace, but stay vigilant if floating. Current prices at 104-26 look like an important intraday pivot.