MBS OPEN: Continued Weakness, Probing Recent Lows

By: Matthew Graham

Last week, 101-05 was the lowest closing price in 4.5% Fannie 30yr MBS.  As can be observed here:

 

After the selling from late yesterday and this morning, which you can see in the graph below, we are once again at those levels.

 

The weakness appears to be persisting at the moment, and it might be a battle to stay above those levels given the tenor set forth so far today.  But it's more likely that the aforementioned battle would be short-lived enough that anyone with a decent time horizon would still benefit from floating.  Even short term deals will have to float intraday unless you still have access to yesterday's rates which should be significantly better.  Even though MBS are not pure "bonds," there is a quantum of solace should we fall through this floor.  The next significant floor suggested by trend analysis is not much farther down at 100-19 and can be seen on the candle chart below:

Moving from "Bond" to Austin Powers: "What does it all mean Basil!?"  (a stretch of a tangent I know...)

 

Things are pretty simple from a lock/float perspective at the moment.  We are waiting for a few key events that should all inform us well.  And even though the green and teal shapes on the chart above might not mean much to you, they do indicate two very relevant price floors from a technical perspective.  If you have closings within a week or two, make your play based on the today's floor at 100-05.  Remember that we like to think of technical triggers in terms of ranges.  So if we had a solid trend at 101-05, a price reading at 101-04 wouldn't be enough of a deviation to consider the trend violated.  So basically, that potential violation would be the lock trigger for short termers today.  Extending your time frame would allow a more aggressive float with the 100-19 price level.

As far as events are concerned, we have the always exciting "month end" for MBS in which we get a non-farm payroll reading and the coupon rolls take place.  Last month's roll gave us a nice boost and even though the price levels on dollar rolls are not indicating the same thing this month, I suspect that much of the padded spread between MBS and lender's rate sheets is due to funding lines being stretched and not as much about manpower as some might argue.  Factor in the investor's various psychological components of a surprise rapid rally and there is further potential tightening of primary vs. secondary price spread as everyone gets comfortable with where we're at, be it in terms of funding lines, manpower, or heart rates.  It's likely that as these factors will be positively addressed by the new year.  If they are not, then we will be alerted to this by the violation of our floors.

There is the other huge looming data item of the Fed buying MBS.  When will it happen?  No one knows, but we've been in good company anticipating after Dec 31st.  This will be a big benefit for MBS prices and especially spreads EVEN IF they don't dump a ton of money into MBS.  The reason?  We just want proof that it's really going to happen.  When the cash changes hands, that makes it REAL.  Utterly conservative bond investors will respond favorably.

In scheduled data today, Case Shiller HPI accelerated to its worst level since its inception.  It now stands at 18% down year over year.  Expectations called for mid to high 17% range.  More recently, the Chicago PMI number hit than the expected 33.0 at 34.1.  This is the first rise in 5 months.  Consumer Confidence will be out at 10AM eastern.  The Dow has opened up 30 -40 points.  Oil's still a touch under 40 bucks a barrel.  Treasuries are better sold in the long end with 2s +1, 3s -1, 5s -7, 10s -12, and 30s - 13.

Stay tuned for consumer confidence (if it impacts MBS, we'll be back shortly) as well as the afternoon drama: "floor violation: to be or not to be." (we hope that one gets canceled).   Until then, floaty float float.