MBS SPECIAL ALERT: Unprecedented Liquidity Breakdown; Another Rout for Bond Markets

By: Matthew Graham •

We began the trading session today in MBS with liquidity conditions possibly WORSE than they were on May 27th, 2009--aka "Black Wednesday."  Unquestionably the past 4 sessions of selling in broader bond markets has been far, FAR worse than Black Wednesday, even if no individual day has matched the 2-point sell-off.  The Week Ahead post was all about this sort of liquidity problem and bears a read if you haven't had a chance yet.  In fact, it turns out to have been all too relevant right out of the gate.

The gaps between buyers and sellers this morning blew out to levels that made it literally impossible to know what the actual price of a mortgage-backed-security was at any given time.  Slowly, traders began to get closer to each other in a sort of agonizing version of "Marco Polo."  Just like in quantum physics where you only have a "probability" of finding an electron in a certain area around the nucleus, Fannie 3.5 MBS are probably somewhere between 99-09 and 99-13 for the past hour.  No one really knows, but we do know the range of probability earlier this morning was around 20 ticks!

The improved liquidity (improved, NOT healthy though) will help us hone in on actual price levels to a better extent as the morning progresses, as will the increasing stability of benchmarks.  In that regard, 10yr yields are coming down off a series of "lower highs" starting just above 2.66 and most recently having a small supportive bounce under 2.63. 

The bottom line to this "special alert," is to get an earlier-than-normal word out that prices have begun the day in a state of disarray.  Rate sheets are destroyed, and the proverbial knife is still falling.  We're essentially STILL waiting for the first evidence of a sideways consolidation in the trading range before we can hope for any sort of bounce back.  This morning has a chance to develop into such a thing depending on how it shapes up into the afternoon.

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
95-19 : -1-05
FNMA 3.5
99-14 : -1-01
FNMA 4.0
102-17 : -0-28
FNMA 4.5
104-31 : -0-21
GNMA 3.0
96-05 : -1-15
GNMA 3.5
99-29 : -1-06
GNMA 4.0
102-18 : -0-28
GNMA 4.5
104-30 : -0-21
FHLMC 3.0
95-12 : -1-06
FHLMC 3.5
99-09 : -1-01
FHLMC 4.0
102-12 : -0-28
FHLMC 4.5
104-06 : -0-17
Pricing as of 11:04 AM EST
Morning 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 morning.
10:40AM  :  Questions Relating to 'Current Coupon," and/or 3.5 vs 4.0
As you're painfully aware, MBS prices have been moving rapidly. This means that there are a lot of Fannie 3.5 coupons in the marketplace despite the fact that today's rate sheets will be more appropriately based on Fannie 4.0s. That said, lenders still have to remain cognizant of 3.5s and many of them still have rates on rate sheets based on 3.5s (3.875-4.375, give or take an eighth).

As such, 3.5s continue to be more actively traded and more liquid than 4.0s though that landscape is in the process of changing. We keep a close eye on that liquidity and will update to 4.0s as the default coupon that's selected upon opening or refreshing the dashboard, but would also advocate watching both. Keep in mind you can click on any security in the "live pricing" table" to bring that security into view on the chart.
9:05AM  :  ALERT ISSUED: Bond Market Breakdown. Zero Liquidity in MBS.
We begin the trading day with MBS struggling to trade, period. The gaps between buyers and buyers and sellers have been brutally wide so far, but are slowly starting to find each other in a twisted sort of game of 'Marco Polo.' If we take the concepts discussed last week about no one wanting to catch falling knives, the first few hours of domestic trading have taken this to the extreme.

Treasuries were already under significant pressure overnight after having fought off a break above 2.633. When domestic trading started to pick up at the CBOT open, Treasuries Futures volume skyrocketed from already high levels and prices fell further. Cash yields rose to 2.667 and MBS entered a state of panic at the open.

Keep in mind that, although the MBS market is relatively large in terms of dollar volume, there are fewer active participants on either sides of a trade even on good days. On bad days, it can be harder to hone in on the real price--hard for sellers to find willing buyers at their preferred price and vice versa. So for most of the morning, buyers and sellers have stared across wide canyons at each other, with woefully infrequent attempts by either side to make the leap.

These sorts of liquidity issues are present in Treasuries as well, but MBS take them to completely different levels. When the liquidity has broken down as much as it had earlier this morning, MBS markets come as close to "shutting down" as they did on Black Wednesday back in 2009.

1 hour into the session and some measure of consensus has emerged as to where real prices are for MBS--about a point lower in Fannie 3.5s at 99-16. There are no events are data driving the weakness. It's all about the same 'structural problems' referenced in 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.
Jeff Anderson  :  "May 55th, more of the same. Longest month of pain in MBS history."
John Rodgers  :  "Open the desk for 5 min each hour!"
John Tassios  :  "How will lenders and secondary markets be able to price out rate sheets under these iliquid conditions today?"
Matthew Graham  :  "i'm confident he would have expressed more concern"
Matthew Graham  :  "they don't know how fast mortgages have risen"
Drexel Hill Mortgage, Inc.  :  "agreed MG but there are talking heads that keep syaing that is is no big deal for mortgage rates to go higher and comparing back to when THEY got a mortgage decades ago which is not apples to apples now "
Matthew Graham  :  "no one thinks that, but that's not why this is happening. We're not 'deciding' rates should go this high this fast"
Drexel Hill Mortgage, Inc.  :  "I can't beleive ANYONE really thinks higher borrowing costs make sense when the 'recovery' hasn't been completed yet except big retail banks that like the higher yields for added profits"
Matthew Graham  :  "yes, this is black wednesday-style liquidity"
Gus Floropoulos  :  "back to 2009/2010"
Matthew Graham  :  "don't read anything into anything right now other than that there's no liquidity and there is no "real" price."
Matthew Graham  :  "not until a big downward one"
JRS  :  "Swings seems to indicate both directions. I haven't seen an upward swing in a while. You really think there could be one in the at-all-near-future?"
Matthew Graham  :  "Could be some substantial swings in store for MBS as liquidity comes on line "
Jason Anker  :  "i just got a 200bp worse from my secondary desk"
Scott Rieke  :  "I wouldn't be surprised with this. In this market, bid/ask is going to be wide."
philip mancuso  :  "Is anyone else seeing a 20 tick spread on fannie 3.5s? I called my broker to make a trade and they are saying 99-10???"
Michael Ullmann  :  "6 percent par by weeks end? Tuesday feels like a lifetime ago, when some LO's were saying higher rates will be good for us. "
Jeff Anderson  :  "GM, all. Welcome to Bernankegeddon! Global meltdown? Someone put on the oven mitts and catch a falling knife somewhere!"
MMNJ  :  "this is an industry changing 8 weeks...."
Christopher Stevens  :  "Nothing like waking up to 2.60. My nerves can't cant take much more of these huge moves. We're talking what another 25-50bps worse in pricing. "
Read what our user's have to say about MBS Live on LinkedIn.
» Start a two week free trial of MBS Live.