MBS RECAP: Decent Improvement, but not Many Reprices
By:
Matthew Graham
•
MBS Live: MBS Afternoon Market Summary
Superficially, today looks like a good one for MBS markets with Fannie 3.5s up a quarter of a point heading into the close. But the "yeah buts" abound. First of all, there are Fannie 4.0s. They're not up quite as much and with the recent rise in rates, they're certainly relevant to lenders' rate sheets (anything over 4.25% is being allocated to 4.0 coupons). They've held the same 2 to 3 tick improvement all day, which isn't really enough for positive reprices.
Then there's the matter of liquidity, or rather, the lack thereof. As we discussed in this morning's update, liquidity was likely to dry up heading into the PM, making for increased volatility. That happened and the volatility worked in favor of the long end of the Treasury yield curve. MBS came along for the ride a little bit, but were very reluctant.
Finally, it's Friday. We just had a big, price-negative shock mid-week, and the upcoming week is Thanksgiving with a super important jobs report the following week. Lenders probably aren't feeling too aggressive about repricing.
Here are some charts and analysis from earlier in the day that arose from a good conversation on the MBS Live Dashboard:
Matthew Graham : "in this morning's update: "trader
participation should drop off even more quickly than it already has by
noon Eastern. This could make for illogical volatility in the afternoon,
but the general expectation for a sideways to slightly positive grind
is already playing out.""
Jeff Anderson : "I'd be happy to call it a day right here. Who's with me?"
Matthew Graham : "if you look at the charts around 11am, you can see where the day unofficially ended. Everything since then is just epilogue."
Brian Bockholdt : "please explain MG"
Matthew Graham : "One of the toughest things for me to wrap my mind around back in the
day was this idea that bond markets could be illiquid. I sat in my
office with CNBC on, originating mortgages, thinking that markets were
markets. If "Citi never sleeps," then surely these flashing numbers on
my TV and computer screen never slept either. I mean c'mon! They're
always moving! It took me a while and required some excellent mentor
conversations to figure out that not all "flashing" means the same
thing.
It's like a pick up basketball game... During prime time when the
best players are there, you get the truest sense of how the teams are
doing vs each other. Sometimes, the higher level players will play all
day. Other times, they'll leave early--sometimes with one team seeing
more attrition than the other.
But the game keeps going... Red vs Green. Depending on who joins
which side, the game could suddenly head a different direction, and it's
not necessarily indicative of how things have gone or will go when the
varsity players get back.
so my point is that these triangles on data-free Fridays that point
perfectly toward noon tend to show you how the game was going, and what
the final score would have been."
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
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Afternoon 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 afternoon.
12:07PM :
MBS Break to new Highs in Light Trading; Some Reprice Potential
Fannie 3.5s are up 6 ticks on the day after being squeezed out of their complacent, triangular range by the flattening yield curve. What does that mean?!
Treasuries are doing much better in longer durations (10s-30s). When the longer-dated yields are dropping relative to the shorter-term maturities (2s-5s), the shape of the overall yield curve is getting flatter (hence "flattening").
MBS have duration too. The lower coupons last longer, and are always paying some level of attention to comparable duration Treasury benchmarks. So when the yield curve is flattening, there's some impetus for lower coupon MBS to be doing better than higher coupons. It's not always a guarantee, but that's how it's happening at the moment.
So even though 3.5s are up 6 ticks, Fannie 4.0s are only up 2, and generally still looking like 3.5s did before they broke out of their consolidative range. The fact that 4.0s aren't as on board with this little technical break does limit the positive reprice potential, but it's certainly not out of the question.
10yr yields are down to 2.7535, and S&Ps are trickling in to all-time highs. Money is flowing into both sides of the market.
Treasuries are doing much better in longer durations (10s-30s). When the longer-dated yields are dropping relative to the shorter-term maturities (2s-5s), the shape of the overall yield curve is getting flatter (hence "flattening").
MBS have duration too. The lower coupons last longer, and are always paying some level of attention to comparable duration Treasury benchmarks. So when the yield curve is flattening, there's some impetus for lower coupon MBS to be doing better than higher coupons. It's not always a guarantee, but that's how it's happening at the moment.
So even though 3.5s are up 6 ticks, Fannie 4.0s are only up 2, and generally still looking like 3.5s did before they broke out of their consolidative range. The fact that 4.0s aren't as on board with this little technical break does limit the positive reprice potential, but it's certainly not out of the question.
10yr yields are down to 2.7535, and S&Ps are trickling in to all-time highs. Money is flowing into both sides of the market.
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.
Matthew Graham : "so my point is that these triangles on data-free Fridays that point perfectly toward noon tend to show you how the game was going, and what the final score would have been."
Matthew Graham : "But the game keeps going... Red vs Green. Depending on who joins which side, the game could suddenly head a different direction, and it's not necessarily indicative of how things have gone or will go when the varsity players get back."
Matthew Graham : "It's like a pick up basketball game... During prime time when the best players are there, you get the truest sense of how the teams are doing vs each other. Sometimes, the higher level players will play all day. Other times, they'll leave early--sometimes with one team seeing more attrition than the other."
Matthew Graham : "One of the toughest things for me to wrap my mind around back in the day was this idea that bond markets could be illiquid. I sat in my office with CNBC on, originating mortgages, thinking that markets were markets. If "Citi never sleeps," then surely these flashing numbers on my TV and computer screen never slept either. I mean c'mon! They're always moving! It took me a while and required some excellent mentor conversations to figure out that not all "flashing" means the same thing."
Brian Bockholdt : "please explain MG"
Matthew Graham : "if you look at the charts around 11am, you can see where the day unofficially ended. Everything since then is just epilogue."
Jeff Anderson : "I'd be happy to call it a day right here. Who's with me?"
Matthew Graham : "in this morning's update: "trader participation should drop off even more quickly than it already has by noon Eastern. This could make for illogical volatility in the afternoon, but the general expectation for a sideways to slightly positive grind is already playing out.""
Brian Bockholdt : "This is a nice surprise"
Andy Pada : "I agree Sung. I just think that somone is misinterpreting."
Joe Daquino : "HELOC or not, you are refinancing an existing first mortgage with no additional cash out......that is rate and term......imo."
Joe Daquino : "That would be the same result if they took out a traditional first mortgage."
Andy Pada : "So what if the borrower took out all the money of hte heloc at time of closing?"
Joe Daquino : "I think it is rate & term, AP."
Mark Wambold : "Ha, I was just about to say it sounds like rate and term to me. The 2009 was the cash out. Good Luck!"
Andy Pada : "does it change for you if the loan that was taken out in 2009 was a traditional first mortgage and not a heloc?"
Scott Valins : "sounds like cash out to me since it's not purchase money"
Andy Pada : "BB, thanks for the info. I am getting conflicting responses. Anyone else care to opine: a) borrower bought property for cash in 2008; b) took out a loan in 2009 (heloc); borrower is now refinancing the existing balance of the heloc and paying closing costs out of pocket in 2013. Is this a cashout refinance or a rate and term refinance. Remember there is only 1 lien/mortgage on the property."
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