MBS RECAP: Apocalyptic Catalogue of Reprice Alerts

MBS Pricing Snapshot

Good night, sweet MBS market. As feared, the Fed is willing to let mortgage markets run the gauntlet of a higher rate environment and see how it goes. This wire is a hearty tap of a nail in our coffin:

FED'S BERNANKE - RISE IN INTEREST RATES DUE TO OPTIMISM ON THE ECONOMY AND ACCURATE ASSESSMENT OF MONETARY POLICY IS A GOOD THING

Here's the logic: IF Bernanke is saying the assessment is accurate, and IF the assessment has been a frantic move to higher rates, THEN Bernanke is saying "yep, you did that right."

To make matters worse, he just told Binyamin Applebaum from the NY Times that "substantial is in the eye of the beholder" meaning that employment growth could be as good as they Fed wants it to be, without regard for other definitions. We also discussed this extensively recently in MBS Commentary posts.

MBS melting down, Stocks tanking, TSY pushing 2.32.

First of all, negative reprices are guaranteed if you haven't seen them. The alert servers are fully functional, and MBS prices are down to new lows at 102-21. 10yr yields are up to 2.2924. Here is some background on why things are happening the way they are:

As it turns out, tapering is still on the table, and the economic outlook is "as good or better" than it was. Bond buying remains intact, but the consensus outlook continues to be "September" for the first major possibility of tapering (it was an outside possibility today).

September tapering supports the recent range, and pending Bernanke comments, may afford us the opportunity to bounce back later today and beyond (days/weeks even). That's still on the table, but not guaranteed. Damage was done by the following:

-Downside risks for economy and labor market have dimished

- Labor market conditions have shown further improvements (this is EXACTLY what Bernanke said would need to happen back in March in order for tapering to begin).

- number of dissenters up from 1 to 2. that's a sign of a shift away from bond buying support. pretty big deal

- Fed beginning to distinguish between jobless rate and overall labor market conditions. (greases the skids to pay less attention to U/E and lean more appropriately on payrolls)

- Long term inflation expectations stable (i.e. no massive deflationary concern that requires printing money to defend against. Even then, inflation threshold in policy is only linked to Fed Funds Rate).

- "increase or reduce" pace of purchases remains in the statement. No one believes "increase" any more.

- Jobless rate forecast fall to 6.5 in 2014 from 6.7 previously. High end of estimates from 7.0 down to 6.8.

Bernanke presser is starting. Again the bottom line is that the 2pm data had a chance to refute the notion of tapering as possibility. It didn't do that. Bernanke's prepared remarks, instead, seem more focused on explaining why tapering is OK (using analogies to explain that Fed will ease off the throttle and this is merely "less support" as opposed to a withdrawal of support).

As the Q&A continues, Bernanke is doing more and more to confirm the reality of tapering in the near future, barring any major economic shift.

No text here... Reprices are coming.

negative reprice risk increasing. More to follow, but volatility has not worked it's way through the market yet. no nails in coffins yet. 10's at 2.23, MBS : no one knows... Bid and ask are so far away. We're probably headed lower at the moment.

Little to be said about it at this point and even less that can be done about it. If you wanted off the ride before the Fed, you should already be off. If you were planning on floating through the Fed and another small reprices is enough to change your mind, then here you go: we're at risk of further reprices now. 10's broke just slightly over their supportive ceiling and trade at 2.2252. Fannie 3.5's are pushing the 103-00 barrier. More negative reprices expected (2nd round from quick lenders and guaranteed first round from anyone else who hasn't repriced yet).

Whereas MBS were down to 103-07+ before, we're now down to 103-05+ now, making negative reprices slightly more risky than they were at the time of the last alert. 10's are up over 2.20 now (2.2035), but it's, as yet, unclear whether or not there will be any sort of mini-snowball momentum heading into FOMC. Right now, we're not there yet, and in fact, trading levels are well-contained by longer term trends--merely looking more serious in the context of 2-day charts.

That's not to say that there isn't a risk of negative reprices present. There is, and it's slightly elevated. But that risk is incidental, and nothing to do with any meaningful trading of today's events--premature or otherwise. Just "nerves" if you will. To be extra clear, that doesn't mean you should float if you need to lock! (just that, if today "drops the big one" on MBS, this ain't it).

It will probably be a bit soon for most lenders and we probably haven't seen sufficient losses, but MBS are edging into a range where negative reprice risk first becomes conceivable. Lenders who priced at the highs would have had 3.5s around 103-12. Given that we're now at 103-07+, the 4.5 ticks is just over the eighth of a point that usually brings about the amber alert. Making things slightly more austere is the fact that 10's have also broken above their overnight highs and are now up to 2.196 after holding under 2.19 previously.