MBS RECAP: Positive Grind All Day Long

MBS Pricing Snapshot

Positive reprices continue to be possible as MBS are pulled nominally higher by Treasury tradeflows.  Here's what that confusing sentence means:

There was heavy betting through the end of November that the longer maturity Treasuries would suffer relative to the shorter duration stuff (because Markets saw Fed staying strong on front end guidance--i.e. "low Fed Funds Rate for a long time." 

That sentiment began to wane heading into December, but made a small resurgence heading into FOMC Wednesday.  That didn't turn out well and now there is a massive unwinding of these bets following FOMC.  30yr bonds are the biggest beneficiary, but 10's and MBS are catching a boost as well.  MBS aren't trading too much at all and most of the improvement is coming from quotes being adjusted to keep pace with Treasury benchmarks.

Here's a chart of 5yr Treasury yields vs 30's to show the dynamic.  The higher the line, the worse traders think 30's would do vs 5's (i.e. betting on 30's moving higher vs 5's). 

Fannie 4.0s are now +10 on the day at 103-10.

MBS continue to grind along a fairly low-volatility path toward higher prices. Short-covering has helped in Treasuries, as well as 'dip buying' (meaning that prices dipped earlier, and some seized on this as a buying opportunity). Tradeflows have been decidedly positive ever since then, and have had room to run until reaching current levels.

We'd expect to see slower going for the rally here, if not an outright bounce as it coincides with post-FOMC levels from Wednesday. Fannie 4.0s are right on the pivot at 103-06 (meaning that's where prices sank to following FOMC, and where we may start to see resistance today).

All that aside, we've seen enough so far to justify some positive reprice potential. Fannie 4.0s are up 6 ticks on the day, and some early rate-sheet lenders may simply be waiting on prices to level-off before pulling the trigger.