MBS RECAP: Contained By The Roll And Treasury Support

By: Matthew Graham
MBS Live: MBS Afternoon Market Summary
Treasuries looked like they were going to put in a nearly perfect repeat performance of yesterday's movements coming out of the 1pm hour (specifically, they'd bottomed out in yield at 10am and were threatening to move higher).  We alluded to this phenomenon this morning in discussing "fractals" on the charts (basically, just "repeating patterns" with less emphasis on specific levels and timing and more emphasis on the shape of the chart).  While the uptrend ultimately continued as far as the low yield were concerned, high yields made a supportive stand at 1.75.  This was a good technical cue for MBS to hold their ground as well, after falling to their post-9am lows into the 1pm hour.  Efforts to bounce back were contained as MBS didn't have much wiggle room thanks to Fannie/Freddie 30yr settlement, which is essentially over.  That didn't keep May coupons from sliding, however.  After today, prices will adjust down nearly 3/8ths of a point as markets shift their focus from April to May coupons.  Data and events pick up tomorrow, but are concentrated in the afternoon with the 10yr Auction at 1pm and FOMC Minutes at 2pm.
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
FNMA 3.0
104-04 : +0-02
FNMA 3.5
106-08 : +0-04
FNMA 4.0
106-25 : -0-04
FNMA 4.5
107-24 : -0-01
GNMA 3.0
105-18 : +0-01
GNMA 3.5
108-16 : +0-04
GNMA 4.0
109-20 : +0-01
GNMA 4.5
109-08 : -0-02
FHLMC 3.0
103-20 : +0-00
FHLMC 3.5
105-31 : +0-02
FHLMC 4.0
106-17 : -0-06
FHLMC 4.5
106-26 : -0-07
Pricing as of 4:05 PM EST
Afternoon Reprice Alerts and Updates
Below is a recap of instant Reprice Alerts and updates issued via email and text alert to MBS Live subscribers this afternoon.

1:26PM  :  ALERT ISSUED: 3yr Auction Misdirection. Stocks/Risk Hurting Bond Markets
This is a reprice alert of sorts, even if not yet the variety that hearkens widespread negative reprices. In fact, it's more of an early warning for most lenders considering we're only 4 ticks between highs and lows. That said, there are some disconcerting patterns forming with respect to the "fractal" relationships mentioned this morning.

The 3yr Auction, while weak, was inconsequential for movement in the longer end of the Treasury yield curve, and similarly inconsequential for MBS. Ahead of the auction, fresh headlines out of Italy (the "left field" region) indicated that Berlusconi and Bersani were beginning to talk about working together. The interesting thing about these headlines is that they came out of Bersani's camp--something that hasn't happened before (in fact, he's been militantly ANTI-Berslusconi). If this changes, it's bad for US bond markets, and did in fact, create a minor shockwave in Bunds and 10's ahead of the auction.

The auction itself produced no meaningful swings. Rather, a relatively well-connected stock lever is trying to pull Treasury yields higher, in the same way as yesterday, and thus far, doing an OK job of it. 10's are now over 1.75 and Fannie 3.0's are wavering between unchanged and a tick weaker on the day. Flows are light, given it's roll day, but any further swings toward "risk-on" (i.e. stocks and bond yields moving higher) could still put enough pressure on MBS that we'd care.

Right now, we're just sort of on the edge where only the earliest-to-act lenders are considering negative reprices.
11:37AM  :  Starting to Look Like Yesterday. So... Time For Weakness?
MBS, Treasuries, and Stocks have all traded in eerily similar patterns to yesterday through the same time. This is characterized by an overnight session that starts sideways for Treasury yields and equities futures, with both moving up in European hours, dipping lower into the 10am hour, leveling off, and rising into the close.

Viewed from an MBS standpoint, both today and yesterday started with prices down several ticks and in both instances, rallying to +2-3 ticks improvement by 10am, then slipping from there. If the pattern holds, we're now entering that selling phase, but perhaps a better way to look at it would be to simply "stay on guard against headwinds" as we're still +0-01 on the day. These sorts of fractal relationships between various pockets of time on the charts is more of an interesting way to examine what's already happened as opposed to predict what will happen going forward.

To that end, technical support in the mid 1.73's (10yr yields) seems important. A break higher likely results on incremental pressure on MBS.

This afternoon's 3yr Auction isn't likely to be a big market mover, but the general unimportance of 2-3 year auctions will start shifting some time this year or next. Naturally, it will happen with 3's first (because markets care less and less about a Treasury security the shorter its duration--i.e. more like "cash" the lower the maturity). As such, we'll be tuned in at 1pm, but not expecting anything massive by way of reaction.

Between now and then, we're keeping an eye on 1.737 (right at current levels) in 10yr yields. That's been more of an incidental short term pivot while the 200-day Moving average is a bit higher at 1.743. Either way, MBS are at their weakest levels since before 9am and looking a bit pale. Stay on guard.
Live Chat Featured Comments
A recap of the featured comments from the MBS Live Dashboard's Live Chat feature, utilized by hundreds of industry professionals each day.

Mike Walker  :  "If that's holding them back, they should modify it to 1.75 up front and allow borrowers to keep the existing annual rate. Compromise that helps both borrowers and HUD."
Ted Rood  :  "Not to mention the bargain 1.35% annual MIP."
John Tassios  :  "FHA needs revenues, and they want a full 1.75 upfront MIP's to replenish their account, so I doubt they will do this."
Ted Rood  :  "way too logical."
Ted Rood  :  "That would be a HUGE heck no, Jeff."
jeff teplitz  :  "someone mentioned once in here that FHA was adjusting the cut off date for streamline refinances MIP and Monthly MI rates from 5/31/09 to 2010. Any one have any more information about that?"
Tom Schwab  :  "REPRICE: 1:25 PM - Flagstar Worse"
Andrew Horowitz  :  "yeah, no one will care until we have a really bad 2 or 3 though"
Matthew Graham  :  "I'm gonna go out on this fairly sturdy limb and say no one really cares too much about about 2's/3's yet. So "weak 3yr auction," is just sort of a factoid without much impact on MBS or even the longer end of the curve"
Andrew Horowitz  :  "weakest b to c in year and a half according to Santelli"
Victor Burek  :  "santelli gave it a C-"
Matthew Graham  :  "probably be a C or worse from Santelli. Less sure than usual though."
Jason Harris  :  "I am just curious as to what DU goes approve at.....I know the deal works under 45%....but I am just over...so I reduced loan and sent back to underwriting at 45% even but I cant re-run DU at this stage so I am not sure if I should have reduced it a little further to get it to 44.99%"
Matthew Graham  :  "if any of that auction jargon is confusing, here's the refresher: http://www.mortgagenewsdaily.com/mortgage_rates/blog/242898.aspx"
Christopher Stevens  :  "depends on the end investor JH"
Matthew Graham  :  "In other news, 3yr Auction coming up... Recent average bid-to-cover has been just over 3.5 with a range of 3.36 to 3.96. Tails are rare, but stop throughs are small. Indirect bidding averages 22% with a range of 18-28 recently. WI at .342 currently. Not expecting it to be a big mover. "
Jason Harris  :  "Is max DTI on Fannie 45% or 44.99%? Yes...I have one that close :)"
Victor Burek  :  "is today's auction gonna matter?"
Matthew Graham  :  "If Bersani and Berlusconi (and anyone else whose name starts with B and ends with I) come together to form a government in Italy, it could be one of those "Europe is fixed" moments for domestic bond markets."
Matthew Graham  :  "RTRS- ITALY CENTRE LEFT OFFICIAL SAYS MEETING BETWEEN BERSANI AND BERLUSCONI WAS GOOD, BUT "WE ARE AT THE BEGINNING" "
Jason York  :  "wow, good to know, I am doing one now, and told the customer he needed 5% of his own, which he had, so it wasn't an issue, but good to know"
Jason Anker  :  "2-4 units = 5% own funds other wise you are good -- B3-4.3-04, Personal Gifts (09/20/2010)"
Jason Anker  :  "KK from 2013 selling guide Greater than 80% One-unit principal residence (Except for high-balance mortgage loans) A minimum borrower contribution from the borrower's own funds is not required. All funds needed to complete the transaction can come from a gift. Two- to four-unit principal residence Second home High-balance mortgage loans The borrower must make a 5% minimum borrower contribution (or 3% for MCM) from his or her own funds. 1 After the minimum borrower contribution has been met, gif"
John Tassios  :  "Braydon: Have them go to the nearest IRS office in their city or town and turn in the taxes there in person / The IRS agent will then give them a stmped recieved and they should show up on the IRS site in 3 to 5 business days"
Kunal Khanna  :  "Guys I have a 90% LTV LPMI Purchase where the enite 10% downpayment is a Gift. Was told yesterday that Fannie Mae changed their guidelines where 5% of the borrowers own funds are not required anymore even if the downpayment is less than 20% and that entire downpayment is a gift. Can anyone confirm the above or point me in the direction of fannies guides on Gifts?"
Brayden Alexander  :  "Does anyone know how to expedite a return at the IRS?"

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