MBS OPEN: No One Wants An Open Position Through The Holidays. MBS Open Weaker

By: Matthew Graham •

In News just out the Q3 Final GDP came out down .5%, in line with expectations.  PCE, the Fed's preferred inflation guage was down to 2.4% slightly lower than the 2.6% consensus  and consumer spending was down 3.8% showing the expected contraction in the economy.  There has been minimal impact on MBS.  Other scheduled data today is as follows:

  • Consumer Sentiment is seen down slightly at 58.6
  • Existing home sales are seen down slightly at a 4.90mln annual rate
  • New Home Sales are seen down from 433k to 420k
  • FHFA Price Index  is seen down 7% year over year
  • Richmond FRB Manufacturing Survey, no consensus, previously down 38.0
  • 22bln in 4 week notes
  • 28 bln in 5 year notes at 1pm

MBS, not in response to just released GDP, are down again from yesterday.  Primarily, the market is contending with an abundance of sellers and not so many buyers.  All open positions are being closed up as a majority of market participants are hanging up the gloves for the holiday.  Sellers are about as keen to leave positions open as the Lions are to win the Super Bowl.  All those sellers and absent buyers made like the turnpike yesterday and took their toll.  More of the same this AM, with the following price action:

  • 4.0's down 25 ticks to 99-11
  • 4.5's down 15 ticks to 100-25
  • 5.0's down 11 ticks to 101-19
  • Ginnie DoD changes are similar with prices about 10 ticks higher
  • In 15 yr Tenors, 4.0's down 11 ticks at 99-28
  • 4.5's down 9 at 101-11
  • 5.0's down 6 to 102-01

Someone forwarded me a link yesterday in which a self-anointed analyst claimed that production was focused in the 5% range.  I'll send you the link if you also would like to live in a fantasy world and make up your own facts as well.  Originator supply yesterday was moderate with just under $3bln in new paper added primarily from 4.5's and to a smaller extent, 4.0's.  Sure 5.0's may still be changing hands, but just because originators are closing loans in the 5.0% range, DOES NOT mean that that's where MBS is being securitized.  Earlier 5.0's from before the $500bln Fed Christmas Present Announcement (cough, cough...  I still don't see anything under the tree..) still have to work their way through the system, but "new" paper is pervasively offered in 4.5's, with the standard deviation nod going to 4's and NOT 5's.  Why is this important?  Because your MBS analysis and pricing is pertinent to the extent that your analysts know what to watch and why. 

As MBS continue retracement mode, we consult the mountaineering chart for our next potential foothold.  It emerges with startling clarity.  The red line below is in a range between 100-18 and 100-20 on 4.5's.

 

This is a fairly reliable short term floor (we don't want to talk about the next one almost 2 points lower).  Indeed, we are approaching it today, only 7 ticks off now, but are unlikely to break through.  So look for the selling to POTENTIALLY abate on these technicals.  The next support "feels" too low based on the current fundamential backdrop, and would be large in a historical context.  Intraday, floating makes sense, but only with vigilance.  If we fall below 100-18, all bets are off, and like we said, there is no clear foothold below that until we approach 99-00.  Sure things probably wouldn't get that bad, but it's good to be ready for anything.