MBS RECAP: Purposeful Rally Helps Define Pre-FOMC Range

MBS Pricing Snapshot

It's conceivable that a lender or two would be considering a negative reprice fairly shortly as Fannie 3.0s have fallen more than 4 ticks from the last reported reprices. Even then, the pace of the selling is relatively contained overall, and Fannie 3.0s are still 14 ticks higher on the day at 103-04. 10's are 1.5bps off their lows at 1.874 currently. Apart from the more volatile post-3pm trading conditions, some of the movement looks to have coincided with comments from Fed's Williams on potential tapering as soon as this summer.

All in all, reprices have gone from "probably impossible" to "an outside possibility." But note that possibility increases with each additional downtick. (also note: this probably doesn't effect slower-to-move lenders who didn't reprice)

MBS had been losing touch with their memories of better times, when they were better able to keep pace with movements in broader bond markets and even outperform them into the beginning of May. Since then, the lower the coupon, the worse the underperformance. This is typical of a negative trend, and it typically turns around when the negative trend ends.

Additionally, lower coupon MBS tend to get a bit panicked if it looks like there's a risk they'll be "left on the island," in a rising interest rate environment. Particularly in 2013, any time 10yr Treasuries make a run toward or over the 2.0% level, this "fear" has been evident in lower MBS coupons (i.e. they lose a lot more ground than higher coupons, and by wider margins than those seen during sell-offs that occurred when benchmark rates are lower).

So when we have days like today (especially when they follow days like yesterday), where 10's are backing down from a run at 2.0%, we can then have afternoons like this one where MBS are making just a bit more progress than benchmarks. It's not a sign of MBS doing anything crazy or unsustainable, but rather a logical result of the supportive bounce in broader markets. It can continue as long as Treasuries don't drive the boat away from our island (head back up over 1.9).

It's like breathing a sigh of relief, and unwinding some of the previous tension. This has been evident not only in the price gains, but also in the speed with which lenders repriced positively today. Ongoing stability keeps positive reprice potential on the table for the rest of the day. Fannie 3.0s are up 20 ticks at 103-10 and 10's are down 7.47 bps at 1.865.