MBS MID-DAY: Ongoing Grind Near Friday's Lows

MBS Pricing Snapshot

When sell-offs like Friday's happen--the kind that are big enough in terms of movement and volume to cause concerns about a broader shift--it can have negative implications for MBS. This has to do with the underlying rate environment running an increased level of risk of 'stranding' lower coupons on the metaphorical island where low coupon MBS stay when the rest of the interest rate world heads higher.

In other words, the recent foray into 1.6's in 10yr Treasury yields was music that Fannie 3.0s (and even 2.5's) could dance to. 10's are probably the best representative--the "captain" if you will--of the overall cruise ship that carries all other manner of fixed income investments on the high seas of the yield curve. Last week's course took the ship as far in one direction as it's been in a long time.

When the cruise ship goes this far, imagine there's an island that now becomes accessible by cutter and/or dingy depending on your preference. Some of the outperformance in late April on the part of MBS would be like taking those smaller boats to the island because the bigger ship was finally close enough to allow for such things and there was some measure of hope that it would stay close enough.

Friday's payroll surprise is the signal for the cruise ship to weigh anchor and head back in the other direction--or so it seemed. Seeing that, lower coupon MBS made a dash for their dingy's and rushed back in the other direction--a relative loss of composure due to fear of being left on the island.

Now we arrive this morning to see the the cruise ship merely sitting right where it was on Friday afternoon. This has restored some measure of confidence for MBS. In other words, Treasuries are flat, so MBS don't have to trade as defensively. Fannie 3.0s are thus 3 ticks higher vs Friday's latest levels (104-04) while 10's are a hair higher but essentially unchanged at 1.7433.

There is no significant data on the calendar for today or for most of the week. The only clearly identifiable topic of conversation for bond markets is the Treasury auction cycle. Even this is a bit of a wash with the old Treasuries maturing this week combined with the scheduled Fed buying amount to a net negative supply (assuming the paybacks will be reinvested.

In other words, between the old Treasury debt that's maturing this week and the Fed's buying, there's no "extra supply" that needs to be bought. This is potentially a major factor in the current flatness, and Treasury flatness tends to be a slight benefit to MBS.