MBS RECAP: Week Begins Calmly Before Impending Storm

MBS Pricing Snapshot

We've discussed "corporate rate-lock selling" in the past as a source of Treasury-specific pressure. This occurs when a firm is issuing a corporate bond (taking in investment that they'll then make payments on at a rate that usually involves a benchmark like 10yr Treasuries + a margin. In a fixed rate offering, the firm may "lock in" its cost of funding by selling Treasuries.

This means they've given up the right to earn today's interest rates in exchange for cash. If prices fall and rates move higher between the time their bond offering is priced and the time it's fully subscribed , they'll have already sold at the price highs, offsetting any fall in prices and effectively "locking in" the rate at which they'll be repaying the investors in their newly issued offering.

Here's more from Reuters on today's potential rate-lock selling. (This weakness has mostly worked it's way through the market and MBS are back near unchanged levels):

(Reuters) - Prices of U.S. Treasuries slipped on Monday as corporate issuers launched deals to try to lock in rates ahead of this week's Federal Reserve policy statement and key U.S. employment report, traders said.

Dan Heckman, senior fixed income strategist at U.S. Bank Wealth Management in Kansas, Missouri, said the market would likely trade "in a pretty tight range" unless Friday's employment report "is incredibly weak" and persuades market participants that the Fed won't begin to cut back on its bond purchases until December."

Currently, many participants believe the U.S. central bank will begin to trim the bond purchases that partly comprise its quantitative easing policy in September.

Energy names dominated the U.S. high-grade primary market on Monday in a week estimated to see $15 billion to $20 billion in corporate issuance. Most of the deals are expected to get done before the Fed's policy announcement on Wednesday and the jobs number on Friday, said IFR, a Thomson Reuters company.

Treasuries are leading a charge into weaker territory for MBS. While 10yr yields are well into their highs of the day now at 2.602, Fannie 3.5 and 4.0 MBS are just now falling in line with their low prices on the day. There is not enough of a gap in prices between rate sheet print times and current levels to justify reprice risk for most lenders, but some might be getting close if we hold here or move any lower.

Fannie 4.0s are 3 ticks off their highs at 103-25+ and Fannie 3.5s are 5 ticks off their highs at 100-23.