MBS RECAP: Mortgages Continue To Underperform; ADP Opportunity

MBS Pricing Snapshot

Now we're at levels where negative reprices are incrementally more likely for more than just one or two lenders, unless we were to bounce immediately higher following this alert.

Things still aren't catastrophically awful, but 3.5s and 3.0s are both into new lows of the day. In 3.5s, especially, the drop to 103-00 even, is noticeably weaker than the previous lows of 103-02.

Trading conditions are volatile in MBS despite 10's holding roughly in line with the mid 2.14's from the last update. Stocks looked like they were going to try to break even on the day, but have backed off (and don't seem to have the juice with only 5 minutes left).

This is a bit of a precarious situation for negative reprice risk because outright price levels are no worse than they were this morning, but are at the lows and heading in the wrong direction late in the day. That's a situation where we occasionally see a lender or two reprice for the worse, so we'd advocate some caution here, but "knowing thy lender," would trump that caution if you have enough experience with the lender in question.

Beyond that, the important point is that MBS are at lows. Fannie 3s are back to 100-05 and 3.5s are down to 103-03. 10yr yields couldn't make it down through 2.12 and are back up to 2.146 as equities rally late in the day. Bottom line: caution > panic, at the moment. We're not immune from an odd reprice or two here, but still inside today's range. We'll let you know if that changes.

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The state of play in MBS is a bit less dire than it had been at the last update. Even though we continue to lag behind Treasuries, and despite an exceptionally bumpy ride from 9:30-present, Fannie 3s and 3.5s have managed to hold on to the morning lows and make incremental improvements from there.

This not only decreases negative reprice risk for the precious few lenders that may have been out before the drop this morning, but due to the conservative rates put out as a result of that drop, the bounce back is beginning to introduce POSITIVE reprice risk into the mix. That would probably take more time or further gains for any other lenders to consider beside the one reprice already out.

Beyond that, we'd caution against further volatility. The gains are good for now, but the positive surprise is equivalent to the kind you get when when your car dies and you manage to get it started and running just long enough to make it to the shop. With 10yr yields at 2.1355, we're right in the middle of the recent range and at a bit of a pivot with yesterday's high yields. If 10's have trouble moving lower from here, MBS won't likely make it back to opening levels.

Fannie 3s are currently down 6 on the day at 100-11 and 3.5s are down 7 at 103-09. Both are roughly a quarter of a point off previous lows, however.