MBS RECAP: Conforming MBS Hold 2-Day Range; Govies Not so Much

It actually turned out to be a rather boring day for the parts of the bond market with which we normally concern ourselves.  Treasuries and conforming MBS both held well-inside yesterday's range despite giving up some ground early.  That's quite a resilient showing considering the circumstances.

Ginnie MBS were less than resilient, however.  The culprit was the announcement of a 50bp reduction in annual MI premiums.  This goes along way toward putting FHA on more equal footing with Fannie/Freddie's recently reintroduced 97% LTV programs.  It also will simply allow existing FHA borrowers to refinance into lower monthly payments, assuming rates stay near current levels between now and the time the changes take effect.

When MBS are priced over PAR (100-00), investors are counting on the average loan in a given pool to last a certain amount of time so that the premium paid (over PAR = premium) can be recouped via interest over time.  The thinking goes: pay more than the face value in exchange for an above market return.

When/if those loans pay off, investors lose that 'above-market' income stream.  They know they won't have it forever, but they're planning on having it for a certain amount of time.  That amount of time is the key component in their estimation of the value of a certain MBS pool/coupon.  Simply put, a refinance enticement--like this drop in MI amid an already low rate environment--increases the speed with which those MBS are retired.  Investors must therefore account for the faster prepayments in their valuation models and accordingly, Ginnie MBS prices get hit as they did today.

All of the above led to a situation where rate sheets were pulled in all sorts of directions depending on which rate and program you were looking at.  At some lenders, only a narrow band of FHA rates were affected.  Additionally, some lenders improved conforming pricing while degrading govie. 

Oh, and none of the economic data made a dent, as expected.  The broader market is focused on Europe.