MBS MID-DAY: Leveling Off After Moderate Morning Weakness

MBS Pricing Snapshot

In the few short minutes since the last alert, we've lost a few more ticks. 10's are up to 1.9873 and S&P's are at their highest levels of the morning. Reprice risk isn't yet at levels that would suggest more than few lenders will pull the trigger, but it's higher than it was 5 minutes ago. If we say here, we'd probably see an 'early crowd' lender or two come in fairly soon.

MBS are at their weakest levels of the morning. Everything has moved very gently in a 'risk-on' direction (stocks/yields higher, MBS Prices lower) since about 8:50am. That means that we didn't even have the first round of rate sheets today before MBS were already a tick or two off their opening highs. Thus, there's only a 2-3 tick gap between current prices and those in force at rate sheet print times.

In other words, the outright differences in prices between then and now are not sufficient to motivate negative reprices, but we're putting this alert out for three reasons:

1. Some lenders don't historically need to see 4+ ticks of losses in order to reprice for the worse, and will consider the current intraday momentum. That momentum is negative at the moment.

2. More importantly, we wanted to bring that momentum to your attention for it's potential near term implications. If prices were to fall further from here, reprices would become incrementally more risky with each tick lower (assuming the lender in question was already out with rates before 10:30am.

3. To whatever extent Fannie 3.5's have a bearing on the rate sheets of the lender in question (if the range of viable 30yr Fannie rates includes 3.875% and higher), things have been choppy and illiiquid in that section of the MBS stack so far this morning, with a few quotes showing up at 105-16 vs rate-sheet-time prices over 105-20. They're back to 105-20 currently though.

Bottom line, negative reprices are unlikely, but an outside possibility for a small number of lenders. More importantly, they'd be increasingly possible if Fannie 3.0s dip below 103-11 for more than a few minutes or by more than a few ticks.

Bond markets are still struggling to identify the next significant source of inspiration for the next move higher or lower. In this morning's Day Ahead, we lamented yesterday's oddly quiet session and mused that bond markets would remain "open to suggestion" today. So far, we're seeing a repeat of the same "weirdness," but simply playing out at slightly stronger levels this morning.

The gains overnight and this morning have been motivated by the only thing that seems to be motivating markets in this nearly data-free (domestically) week: Europe and the Risk-On/Risk-Off trade. Moves have been shallow and modest with German Bunds falling 3-4 bps in yield overnight and YS Treasuries playing some catch-up after widening out post-EU Close yesterday (all that means is that Bund yields began declining around 11am yesterday while 10yr yields held sideways or slightly higher.

Before Europe opened, Asian markets dragged bond yields gently higher to begin the night with a steady series of lower highs which is currently being tested by a positive open in US equities. The same phenomenon has MBS at their lows of the morning after opening in similarly stronger territory. Fannie 3.0s are currently up 5 ticks at 103-13. 10yr yields are down 2.5bps at 1.98 and while they're not following stocks in perfect lock-step, the two did bottom out together when S&P futures hit 1499 just before 9am (and 10yr yields dipped just briefly under 1.97).

Now with the benefit of being able to observe the morning's price action and overnight lack of news out of Europe, there's even more reason to commit to the 'wait and see" approach on the part of bond markets. So far tjey're seeing similar apathy to yesterday, simply in friendlier territory, but also some reason for that territory to be challenged by the stock lever and a moderate bounce back toward "risk-on" as the domestic session picks up steam. Waiting and seeing...