MBS RECAP: Best Week Of Gains Since June 2012
By now, it's clear that 3 days of bad employment data gave MBS a big boost this week, but if it feels like there's more to it than that, there is. Last week, markets were partly deceived by an overabundance of attention being paid to Cyprus, when in fact it was Italy that has been and still is the bigger deal as far as systemic Eurozone risk is concerned. That realization worked its way through markets last Wednesday, and we were then left with an eerie silence, not quite sure what to expect after the long holiday weekend. Europe was out until Tuesday, and when they got back in, we not only heard that it would be 10 days before any substantive news from Italy was even possible, but we also saw that European markets didn't have much else to say. Things stayed unbelievable flat through Tuesday and it dawned on us (and probably a lot of other market participants) that all we had coming up were several big pieces of employment data, culminating with the biggest this morning.
Recall that a huge reason for mortgage market weakness so far in 2013 has been the adjustment of Fed buying expectations. These three days of crummy labor market indicators have served as the cold bucket of water for the red hot ingot that has been mortgage underperformance in 2013. You know how that blacksmith stuff works? Big sizzle noise, lots of steam, and voila! Expectations for Fed MBS buying have been tempered! The fact that bond markets were caught a bit offsides on Wednesday morning helped fuel the sense of abruptness as well. There's still some chance that this was all just an epic cleansing process of trading positions that were betting too heavily on higher rates, but we'll need a few more days of reaction to start assessing that possibility. For now, this is only the first day since early December that rates have truly challenged their long-term uptrend.
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| Pricing as of 4:04 PM EST | ||||||||||||||
Even so, other early-to-reprice type lenders should not be seen as immune from reprice risk simply because we're 3/8ths of a point higher on the day. We're still not at levels where widespread reprices are "likely," but they're "less unlikely" than they were 45 minutes ago.
Fannie 3.0s at 104-12 from 104-18+ highs. 10yr yields at 1.7060.
Bond markets have softened up just a bit, but the fact that 10yr yields are below 1.70 says quite a lot about the relative softness (still down 7 bps on the day). Even so, there's been a moderate drift higher in yield from 1.68 to 1.696 over the past hour and MBS have taken a few sips from that cup of late-day, light-liquidity, rally exhaustion. Stocks are moving higher as well, but we're really not feeling the whole stock-lever thing today (i.e. even short term, stock prices and bond yields are quite dislocated today).
Fannie 3.0 MBS are off their 104-18+ highs and currently sit at 104-13. 5 ticks is enough for some lenders to reprice worse, and some rate sheets did actually hit close to those highs. In and of itself, it doesn't LOOK like a reprice risk situation based on losing 5 ticks from what had been a 19 tick gain, but combined with what is likely a high lock volume environment, those possibilities are starting to materialize. So we're moving from "nearly impossible" to "possible," as far as negative reprice risk potential is concerned, though we're not yet near "likely" for most lenders.