MBS Day Ahead: MBS Roll Likely Ends Range Breakout

Thursday is probably the most action-packed day of the week for MBS.  It gets most of the way there by being a fairly action-packed day for bond markets in general and then adds "the roll" for MBS. 

The roll refers to the day in the MBS settlement cycle where sellers notify buyers of the loans that fill the MBS pools they've agreed to trade.  For instance, if I'm selling you $500 million Fannie 4.0s, all you know until tonight is that I've agreed to give you $500 million in Fannie 4.0s in exchange for whatever you already agreed to pay for them.

There are certain characteristics that those pools are required to meet just like there are certain characteristics loan files must meet in order to be conforming, etc.  Notification day is when all the loans that are actually moving on to life as part of an MBS pool get officially allocated to those pools. 

The important part about notification day from a market-watching standpoint is that it marks the last day to trade the current month's coupons.  After all, anything that's settling this month will have just been allocated to a pool and can no longer be traded. 

The implication is that market watchers lose their leading representative of "MBS Prices" and must now shift to using the next month of coupons as a representative for prices.  The trailing month has a lower price for the same reason longer lock time frames cost more.  It always had a lower price and notification day doesn't necessarily change anything about the trailing month's price.

But! In switching from May to June coupons, we're switching from that front-month to the trailing month (which had the lower price), making it LOOK like prices drop significantly.  Lenders are already well-acquainted with June MBS prices as anything that's not being securitized this month is being priced as a June MBS or later anyway.  So there is no implication for rate sheets, just a visual adjustment in price levels.  Here's how Fannie 4.0s and 3.5s would look if the roll had happened yesterday.

Of course that assumes that markets don't move today, which is unlikely.  The magnitude of the movement depends on several key events.  I'd give some credit to Jobless Claims at 8:30am, if for no other reason that it's the only relevant piece of economic data this week apart from Monday's ISM Services.  Yellen speaks again today at 9:30am.  Surprises are even less likely, but the Fed Chair is always a potential market mover. 

Finally, the week's last Treasury auction wraps up at 1pm, with results out at 1:01:30, give or take a few seconds.  Unlike some auctions, this is the last of the "quarterly refunding" auctions, and stands a slightly greater chance to give way to a more concerted post-auction move.  All things being equal, those moves--when they happen on Thursday--tend to be positive for bond markets, but that positivity depends greatly on how the day has gone so far, as well as the auction itself.