MBS RECAP: Light Volume Stability Falls Victim to Headlines

MBS Pricing Snapshot

Robin Harding is the FT's version of WSJ's Hilsenrath, and some would argue a more credible one at that. Whereas Hilsenrath was out on May 10th with a piece that was generally "pro-tapering," and then out again last Thursday with a sort of "yeah but" piece regarding the Fed Funds Rate portion of monetary policy, Harding seems to have re-grounded the discussion this afternoon.

There's nothing new offered by the FT piece, but it's all about that "re-grounding" of the discussion. Harding points out the fact that Payrolls were averaging 130k in the 6 months running up to QE3 and have averaged 194k in the past 6 months, also making note of the decreased volatility (which has been one of our most important observations about the most recent NFP, in that it further smoothed out volatility in the data-set).

The less mainstream suggestion is that the current level of job growth may be just fine for the Fed considering recent research suggests the participation rate might not bounce back as quickly as initially thought. This is a reiteration of the warnings offered on MBS Live after the last NFP when we addressed the "myth" of a 200k line of demarcation between insufficient and substantial growth needed to trigger a reduction in Fed asset purchases.

Harding's conclusion is that the Fed intends to fire a warning shot of sorts, but not to bombard markets with ongoing tapering unless the recently steady--if tepid--pace of improvement can be sustained. Said warning shot is unfortunately vague: "Ben Bernanke is likely to signal that the US Federal Reserve is close to tapering down its $85bn-a-month in asset purchases when he holds a press conference on Wednesday, but balance that by saying subsequent moves depend on what happens to the economy."

This one seems to have made the rounds fairly quickly and was immediately latched onto by bored, flat markets shortly after it's 2pm print time. The extreme lack of volume, the 2 and a half days of gains for bond markets, and concurrent comments from the G8 summit give the illusion of an oversized reaction to news that isn't really new. In the grand scheme of things, those three factors precipitated a modest pre-FOMC bounce, very much contained by recent trends. They've done nothing to alter the bigger picture or create any change in prevailing momentum (which continues to be sideways).

Fannie 3.5's are bouncing around 9-10 ticks weaker on the day, hitting 103-07 and 103-08 support levels (which have been a central pivot in late May and early June). 10yr yields look to be leveling off in a triangle/pennant around 2.17 and equities have already bounced at 2:28pm.

A majority of lenders will likely reprice at current levels, and more than a few have repriced already.

Treasuries, stock markets, and MBS are all selling following comments from the G8 summit. Perhaps of equal or greater concern given the nature of the moves is an article from the Financial Times making rounds at the same time, indicating that the "Fed is Likely To Signal a Tapering Move."

Fannie 3.5s are down 6 ticks on the day now at 103-11. 10yr yields are up to 2.1727, and negative reprice risk is incrementally higher than it was last time. Most of the 'early crowd' lenders will reprice at these levels, and likely some of the middle of the pack as well.

After holding ground quite well all day, the 2pm hour has seen MBS break to new lows with Fannie 3.5s down 3 ticks to 103-13+. This puts some lenders down an eighth from rate sheet time. Combined with the fact that volatility looks to be picking up in Treasuries as well and negative reprice risk is making a debut for the day. Nothing severe yet, but we've moved from "unlikely" to "possible." A few of the fastest-acting lenders might be closer to "probable" if we don't bounce higher in the next minute or two.

Trading activity continues to be muted at best with 3.5s well contained between 103-17 and 103-14+. While MBS haven't fallen past the day's previous lows, they're back in line with them. At the same time, 10yr yields are near their highs. Combine this with recently higher likelihoods of afternoon shakiness and it's potentially worth increasing one's level of vigilance.

More simply put, there's no negative reprice risk now, but if that's going to change, this is the first chance in about 3 hours. Stay tuned.