MBS Market Update: What's a Flight to Quality Cost These Days?
While more risk averse fixed income securities received a continued flight to safety bid today, the MBS coupon stack was subjected to an influx of available supply due to originator's decisions to sell sell sell. Mortgages were outperformed by Treasuries, Agency Debt, and Swaps as market participants stretched out yesterday's flight to quality trading strategy while foul global economic data and automaker sales atrocities are absorbed.
The benchmark FN 5.0 closed down 4/32 at 100-29. The FN 5.5 closed down 12/32 at 101-21. The FN 6.0 sold off 10 ticks to 102-05 and the 6.5 was trading at 102-21, down -9/32, at going out levels (4:45pm). Today's session could be described as skittish with above average volume. We saw aggressive lenders pass through some nice mid-day gains only to have them quickly taken away when the 5.0 retested the 100-23 intraday low. Although MBS spreads (to the yield curve and swaps) widened up it was a down in coupon day.
As Matt pointed out in his morning post the 5.0 MBS is trading above last week's post-Paulson press release euphoric high of 100-23. This is a mortgage pricing positive and we feel one should be reminded of the current profit taking environment...government crutch or not. We aren't saying we don't expect spreads to tighten up, they are indeed wider than Hank and Ben would like to see, we just feel that the relative marginal gains may not be worth the lost sleep. To avoid accusations of side stepping the big issue: lock or float here is some sound advice....
Stay true to a range. Yesterday's 5.0 high of 101-16 is the definite "take your money and run" resistance level. In other words this is where we expect to see selling/profit taking pick up (rates get worse). Last week's 100-23 high/today's 100-23 price low will serve as a tight downside support level. If the 5.0 quickly sells through 100-23 we would advise waiting it out for a return to MBS glory...but only if you have the time. If you enjoy being able to relax and do not have the time to wait for a government funded artificial rate reduction then use 100-23 as your "glad to have great rates, I am not greedy so I will happily lock in now" price point :-). Aggressive lenders will still price a 5.00% 30 year fixed mortgage close to par at this bid level. Here is an illustration of this range... use the dashed lines as shorter term (intraday) support and resistance levels.
Going back to spreads.... just because I heard more of the old "I watch the UST10Y to gauge mortgage rates" locking strategy today....here is a chart of the FN 5.0 price vs. the 10 yr Treasury price. This is part of what we mean by "spreads widening"....the red is the difference in price between the 10yr Treasury and the current coupon, the FN 5.0. If you're not an MBS watcher hopefully this will explain the unexpected reprices for the worse.
In other important news ...The Fed extended their Quantitative Easing strategies for a few more months.
From the Federal Reserve Press Release:
"The Federal Reserve on Tuesday announced the extension through April 30, 2009, of three liquidity facilities: the Primary Dealer Credit Facility (PDCF), the Asset-Backed Commercial Paper Money Market Fund Liquidity Facility (AMLF), and the Term Securities Lending Facility (TSLF). These facilities had previously been authorized through January 30, 2009."
"The PDCF provides discount window loans to primary dealers. The AMLF provides loans to depository institutions to purchase asset-backed commercial paper from money market mutual funds. Under the TSLF, the Federal Reserve Bank of New York auctions term loans of Treasury securities to primary dealers. The CPFF provides a liquidity backstop to U.S. issuers of commercial paper. The MMIFF supports a private-sector initiative to provide liquidity to U.S. money market investors."
These lending facilities are an INCREDIBLY IMPORTANT part of the recovery process. Without this banking system life support, near zero effective Fed funds rates mean nothing....money will not created and deflation will grip our economy. Cheer these extensions and pray for the multiplier effect to take over!
After announcing YoY auto sales respective declines of 41%, 31%, and 47%, GM, Ford, and Chrysler will again be visiting Capitol Hill with hat in hand to beg for emergency funding to avoid looming bankruptcy. Rick Wagoner will, however, sleep easier tonight after House "pants wearer", I mean House Speaker, Nancy Pelosi said she expects a rescue plan to be enacted....I found it amusing that one of her supporting reasons for this is due to the fact that bankruptcy "takes too long". How about the fact that we could lose 2.5 million more jobs if they failed Nancy?
Anyway tomorrow we get back to fundamentals. Lots of data to digest:
MBA Mortgage Application Survey at 7AM: Should see some positives after rates dipped last week.
ADP National Employment (Nov) at 8:15: Iffey correlation to NFP reports. Nonetheless still a jobs report.
Q3 Productivity and Costs at 8:30: Can't wait to see how the "still employed" stepped up to carry the increased work load. Consensus output per hour will rise close to 1.00%.
ISM Non-Manufacturing Index at 10:00: expecting close to 42
Fed releases its Beige Book at 2pm: its always fun to read into Fed verbiage
PLUS we get to hear from two Fed speakers. Fed Governor Kroszner at 10:15 on the CRA and mortgage crisis then at 1:00pm Richmond's Lacker will talk on the economic outlook.
This is just a taste of what you've been missing out on by not being an MBSLive subscriber...want to know more?
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