MBS OPEN: Morning Cliff Diving 5.0's down 8 ticks to 100-25

The beat goes on this AM as MBS extend their losses from yesterday afternoon and are yet again wider to treasuries.  Speaking of treasuries, they saw perhaps their largest FTQ buy up in quite a while, and in fact, rivaled their major move from last week.  The 10yr is still in ridiculously low range at 2.77%.  The 30 yr yield looks more like a 10 year yield at 3.28% despite being down over 30 ticks this AM.  MBS did "OK" yesterday despite a reasonable amount of widening, which is par for the course during treasury rallies these days.

What is not par for the course is for MBS to widen as treasuries sell off.  That is the case this AM.  The best benchmark for the current coupon is an interpolated blend between 5yr tsy's (down a scant 1 tick) and 10 yrs (down about 4 ticks).  5.0's in comparison are down 8 ticks and holding the 100-25 level.  This is nothing to complain about, however, for two reasons.  First, this is still a few ticks higher than the high plateau we achieved last week at 100-23, and second, well, it's still downright great territory for MBS price.  Granted, these levels seem entirely predicated on low treasury prices, but nonetheless, it gives lenders the ability to price 5.0% near par.  Do lenders seem to be passing on these gains?  No.  Not most of them.  Chalk it up to month end funding flow issues tempered by the normal hesitance often concomitant with rapid gains.

If we could sustain a "consolidation" period where MBS trade more or less sideways, it would serve to create a new plateau and give both traders and lenders a basis on which to trade and price into year end.  Volatility and the stock lever are invited to take center stage today as we have just about no economic data.  There are motor vehicle sales and a few speeches, one by Hank the Tank and the other by Philly Fed's Plosser.  Year end balance sheet concerns are still a price-negative force exerted on MBS whereas the looming possibility of sizeable fed injections bolsters hope for further strength.  One thing's for sure, spreads certainly are not as narrow as the government would like them to be.  Now, whether they do anything else about that between now and the end of the year is anyone's guess.

Speaking of guesses, ours remains the same.  Lock at the highs of the range and float following weakness.  Yesterday afternoon (as advised) and even this AM would fall more into the "highs" category and even if one chose to float now, the realized gains would probably be far less than the potential losses, especially if treasuries decide to correct a bit.  However, if you didn't lock yesterday, and do not have overnight price protection, you're cleared to float INTERDAY (not intraday!).  We'll update you on the necessity to act on that as it becomes relevant.