MBS RECAP: Data Delivers on Promise of Volatility

MBS Pricing Snapshot

Fannie 4.0s are now back down to 102-31+ and 10yr yields are back up to 2.774 after an earlier rally brought them to 103-06 and 2.737 respectively. The trade-flow-based nature of the rally made it unlikely to push through those levels, but not necessarily likely to bounce back to current levels.

With a 7 tick gap in MBS from the highs, some of the lenders that repriced twice today may soon consider a negative reprice. Most of the lenders who only repriced one time today have room for a few more ticks of weakness without negative reprices being a risk. Some lenders may actually reprice positively (a few were just reported) if they hadn't yet repriced today.

All told, this is a fairly tame correction back to the day's prevalent range as opposed to high-momentum sell-off. It's not worthy of panic, but a faster-acting lender would be justified in mulling a reprice.

The outright level of Fed MBS purchases have remained fairly steady--as they must considering the fixed dollar amount allocated to them each month from QE and the fairly stead amount from the monthly interest/principal payments on their existing portfolio. But the allocation of those purchases continues a shift toward higher coupons.

Last week's buying details showed $4.45 bln going to Fannie/Freddie 3.5 coupons with that number falling to $3.75 bln this week. 4.0 coupons (where most securitized loans between 4.375% and 4.875% end up) were at $4.05 bln last week compared to $5.05 bln this week.

Last week's details HERE. This week's details HERE.

Positive reprices have been reported and may continue to come across as MBS made it back to today's opening levels. 10yr yields have yet to break through the inflection point set up by Tuesday and Wednesday's high yields (2.73), but at 2.737, they got very close before bouncing up.

MBS were more willing to follow this most recent move with Fannie 4.0s making it back to 103-06, right in line with opening levels before bouncing back to 103-02 currently. MBS maybe have indirectly been a leader of the rally as well with the Fed's forced daily buying coinciding with a supportive level in spreads (meaning that MBS had underperformed Treasuries by as much as they had for several weeks, and at a level that has been frequently visited enough that it looked like the scene of a potential bounce).

Short covering in Treasuries added to the positive snowball--one that's easier to roll in lower afternoon volume. The trade-flow-based nature of the rally is already being felt as 10's are up to 2.752 in fairly short order. Some reprices may continue to trickle across, but while 2.73 remains unbroken, the broader picture is still fairly weak. Unless tomorrow's data is weak and 10's are moving strongly below 2.73, think of this rally as a consolation prize.

At 2.763, 10yr yields are right in line with their 8:30am levels. The move lower followed a technical break at 2.774 just after 1pm. MBS have been a bit slower to follow the bounce back with Fannie 4.0s not yet back to their 8:30am levels (103-02 currently vs 103-05/06 at 8:30am).

Even so, it's been enough for one positive reprice so far. Others may be more shy until/unless we see more developed gains, and can attribute them to something other than a post-sell-off consolidation and covering of shorts.

Both MBS and Treasuries continue to limp along in significantly weaker territory on the day but are well off their weakest levels that followed the first round of data this morning. For instance, Fannie 4.0's briefly hit 102-20 and are now at 103-30, a level they've held at or near for more than 2 hours! 10yr yields were as high as 2.823 and relatively quickly bounced back to 2.772 before stocks opened. Those two levels have been bookends for the rest of the morning's range.

The Philly Fed data was the only saving grace among the economic reports as far as rates are concerned. While it did serve to reinforce the weakest levels as supportive, it's been frustratingly unable to to motivate a break back into "pre-data" territory (2.76's in 10's or much over 103-00 in Fannie 4.0s).

There is no other significant data on the calendar today, so we're left to watch markets "trade it out" in lower volume. There is a clearly delineated gap between 2.775 and 2.753 (the previous intraday high on July 5th). Unless we cross that gap, the damage is already done for today. If that happens, 2.73 would also be an important pivot point in confirming a short term recovery.

Sadly, there's no reason to expect this will happen. More likely, we've just seen confirmation that our post-FOMC consolidative range is sloped toward slightly higher rates as opposed to being a truly flat consolidation pattern. That does leave room for lower rates between now and NFP, but not without justification. Tomorrow morning's data is probably the next place we could find such a thing.