MBS RECAP: Attempting To Consolidate After Wednesday's Sell-Off

By: Matthew Graham
MBS Live: MBS Afternoon Market Summary
Treasuries had a bit of an easier time today than MBS, the latter feeling the effects of a shift in duration preference that has been historically unkind to Fannie 3.0 30yr Fixed MBS.  So far in 2013, when 10yr yields have approached 2.0%, The lower end of the production MBS coupon range feels the biggest pinch.  This has to do with the negative convexity inherent to MBS markets.  In short, if the broad swath of interest rates in the financial world are at a certain level and moving higher, there is a certain point on the spectrum of liquid MBS coupons where liquidity begins to dry up and prices tend to fall much faster than higher coupons because investors don't want to be stuck earning interest at a lower rate in a rising rate environment.  That's a bit of an oversimplification, but the bottom line is that MBS have been more or less blind-sided by this swing, due largely to the short time frame between the best levels of the year and the worst (3 short weeks).  While Treasuries eked out small gains today, MBS are heading out the door struggling to make it to unchanged levels.  Lenders' rate sheets reflect the frustration at the volatility.  Data shook things up only modestly in the morning with the rest of the day spent consolidating near yesterday's weakest levels.  We're still picking up the pieces and still not sure what's going to happen next. 
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
101-20 : -0-02
FNMA 3.5
104-19 : -0-03
FNMA 4.0
106-02 : +0-01
FNMA 4.5
107-06 : +0-02
GNMA 3.0
102-32 : -0-01
GNMA 3.5
106-14 : -0-02
GNMA 4.0
107-06 : -0-04
GNMA 4.5
107-15 : +0-01
FHLMC 3.0
101-08 : -0-02
FHLMC 3.5
104-12 : -0-03
FHLMC 4.0
105-26 : +0-00
FHLMC 4.5
106-10 : +0-03
Pricing as of 4:09 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.

2:36PM  :  NY Fed's Net MBS Purchases Through May 22nd
Highlights:
- Net Purchases $15.3 bln vs $15.1 bln previously
- Allocations roughly similar with some 'up-in-coupon' exceptions.
- Fannie 2.5's dropped to $100 mil from $350 mil previously
- Fannie 3.5's rose to $700 mil from $450 mil previously
- Other than those 2.5's and 3.5s, everything else in 30yr Fixed GSEs was 3.0s (total of $8.85 bln) Full breakdown and link to archives
2:10PM  :  Holding Ground Off Previous Lows; Some Positive Reprices
Fannie 3.0s are only 3+ ticks in the red now compared to 7 ticks earlier today (101-19 vs 101-15). Simply holding sideways just under these unchanged levels has been enough for a few lenders to come out with positive reprices, but it's important to note that those reprices aren't indicative of a bullish shift in today's trend.

On the bright side, the ground-holding is now the longest-standing instance of "flat-to-improving" prices we've had over the past two sessions, and for that, we're thankful. Other lenders may express their thanks the longer it continues to hold.

10's are still about a bp in the green at 2.0298 but have seen 2 decent supportive bounces at and just under 2.05. We're not putting this out as a positive reprice alert, however, because we're not especially confident that the uptrend continues, and to a lesser extent because other lenders may have yet to negatively reprice (though they'd be very late). We're still not out of the woods.
12:22PM  :  The New York Fed Staff Forecast—May 2013
(Check out the charts in the Agenda HERE. The NY Fed is forecasting 3.5% growth in 2014. Plenty of other interesting charts as well.)

As we did last year around this time, we’re presenting the New York Fed staff outlook for the U.S. economy to the Bank’s Economic Advisory Panel at today’s meeting. It provides an opportunity to get valuable feedback from leading economists in academia and the private sector on the staff forecast; such feedback helps us evaluate the assumptions and reasoning underlying our forecast and the risks to it. It’s important to open the staff forecast to periodic evaluation to inform the staff’s discussions with New York Fed President Bill Dudley about economic conditions. In the same spirit of inviting feedback, we’re sharing a short summary of our forecast; for more, see the material from the Panel’s meeting.

The forecast anticipates moderate economic expansion over the next two years. Real GDP growth in 2013 is expected to be around 2½ percent, slightly below the rate in 2013:Q1 as well as below our year-ago projection of about 3 percent. A major factor behind the projected sluggishness over the rest of this year is fiscal policy. The combination of sequestration and the tax increases associated with the agreement to avert the “fiscal cliff” is anticipated to exert a significant drag on GDP growth of more than 1 percentage point. In 2014, the fiscal drag is expected to be smaller than in 2013. With a smaller fiscal drag, an expected further lessening of other headwinds—for example, the European sovereign debt crisis and the deleveraging of household balance sheets—and further improvement in labor market and financial conditions, we project real growth in 2014 of around 3¼ percent.
11:07AM  :  ALERT ISSUED: Negative Reprice Risk Increases Again. More Serious
MBS are down another quick few ticks after the Fed's POMO results with Fannie 3.0s off 7 on the day now to 101-16. Treasuries just broke their higher of the day with 10's moving to 2.043. Negative reprices are now probable vs "possible" previously.
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.

Scott Valins  :  "REPRICE: 11:36 AM - Fifth Third Mortgage Worse"
Matthew Carver  :  "REPRICE: 11:35 AM - Flagstar Worse"
Gus Floropoulos  :  "REPRICE: 11:30 AM - PHH Worse"

Read what our user's have to say about MBS Live on LinkedIn.
» Start a two week free trial of MBS Live.