MBS UBER POST: 1/8 In Review, The End Of The Credit Crisis?, Rocks, And "Rolls"

By: Matthew Graham •

Recap of today's events for MBS:

Today, within the scope of penultimate trading days before Class A settlement, was quite stable.  The charts are choppy, yet reasonably range-bound.  In English please?  The difference between highs and lows was not as great as we might expect given that today is the last day of regular trading before the January MBS coupon goes into settlement mode tomorrow, meaning that the pools of loans that will comprise January's MBS will be allocated and delivered from sellers to buyers between now and Tuesday.  And choppy simply refers to the expected "back and forth" volatility that normally accompanies the last few days of a coupon before it is settled.  Ergo, since we could expect choppiness and since we are already waiting with bated breath for "something unexpected and bad" to happen, the fact that the 4.5 only varied from 102-14 to 102-24 today, a scant 10 ticks, and never got worse than 1 tick down day-over-day, is, well, pretty nice.  It's the kind of stability and predictability, the likes of which we've not seen in the MBS market for many moons. 

But a happy environment for MBS does not necessarily make a happy environment for rates these days.  If anyone knows a good ENT, please send a card along as mine and Adam's ears are bleeding profusely due to the lamentations of our broker cohorts observing improvements in MBS pricing only to be met by reprices for the worse among lenders.  It seems to be all we've been discussing for weeks, yet the question persists.  Since everyone loves repeating themselves, here goes...


Shifting Gears Back to the rest of the day.  How about a chart?  Here is yesterday and today in Fannie 4.5's



Pricing today was almost exclusively driven by flow considerations leading into the settlement.  In other words, prices were more a factor of the micro market forces created by the trade flow between MBS dealers and not the macro market forces of scheduled data and headlines.  The only possible exception would be the noticeable break from the morning's range-bind at around 1:15 which coincided with a well bid 10yr treasury auction.  What's that?  MBS and the 10 yr moving in opposite directions?!  Yes Mortimer...  Dust off your ^tnx ticker tape machine.  It might be time to start accepting that treasuries are disconnected enough with MBS that even you must stand up and take notice (careful now... you might be sore from years of laboring under misapprehensions).  Want more eh?  How bout a chart?  MBS prices in red, 10yr prices in blue over yesterday and today...  Notice the reversal of fortune at auction time where blue rapidly closes the gap on red and finishes the day strong.



The Ninja and Pals report that 59% of the 10.2 billion dollars the Fed has spent this week has gone to 4.5's and 5.0's.  This makes sense as there is plenty of supply in 5.0's from the entire month of December.  A shift should continue to occur, however, as 5's become a thing of the past, to lower coupons.  Indeed,Uncle Same Bought 1.5 billion today in 4s.  The Ninja, and Adam, and I all expect the buying to be focused primarily in 4.0s and 4.5s with perhaps a surprise appearance by 3.5s in the not too distant future.  (please!  no questions like "matt! does this mean mortgage rates will be 3.5%!?!?!?"  A)not any time soon B)Maybe not ever, C)I don't know.)

In other potentially interesting news today...

- Those wacky congresspeople got Citi to agree to play ball and kick off a run on BK's by anyone with negative home equity!  What?


- Frannie announced they were extending the moratorium on all foreclosure sales and ecixtions on SFR's through the end of Jan.  The intention is to provide additional time for mods, short sales, etc...  This is not unwelcome news to MBS as it can keep prepayments on these loans (because a foreclosure means the investor gets their money back too soon), which are almost always in the "premium" area of the stack (meaning investors paid YSP to get them in exchange for higher interest rates), in check to a greater extent than they otherwise would be. more...

- Swap spreads are dropping to levels that beg the question: is this the desuetude of the credit crisis?  Check the chart on the 2yr swap spread!  We're right at the level that signifying the beginning of the end when we cracked it on the way up.  Will cracking it on the way down be the end of an end, thus potentially a new beginning for credit?  Doubtful, but it's a nice thought.




- and just for kicks...  how are we doing in MBS in the long run?  Hmmm...  Pretty good.  huh... What kind of idiot would have predicted MBS prices would improve in January after hitting all time highs in February!  An idiot like me...  Enjoy this chart, better examples to follow in the ensuing months. 




And because I know you want to know what the chart looked like going all the way back to '03 (since the only way to fit that chart was to go with weekly data points, I had to extend the chart as it only drew through last week)

Almost done...  Promise...

Tomorrow begins that traditionally supportive weekend for MBS where we get Non-Farm Payrolls, culminating in coupon settlements (or "rolls") by tuesday.  There's a buzz that NFP will be worse than the consensus and indeed some of our favorite economists agree.  My thought is, if not this month, then surely next month.  But even though the consensus is for 550k loss, don't be surprised to see it crack 600k.  We'll also get wholesale inventories at 10AM, but who really cares?  Am I right people!?  They're always last to be kicked for the kickball team of important data on NFP days.  A close second for that honor these days are "B" list fed speeches like that of Richmond's Lacker tomorrow at 1230 est.

Don't expect logical directionality in MBS based on NFP.  Even if it appears that way, it will likely be coincidence, unless something is catastrophic in the NFP report.  Still, MBS have been so very disconnected from anything but themselves in recent sessions, it would take one heck of a tape-bomb to change that.

And so it's off to bed for the lot of us.  Don't bother with any strategizing about locking or floating right now.  I REALLY think, unless we lose BIG tomorrow, that waiting to see what primary/secondary spreads start to do after settlement, will be worth even a few reprices for the worse between now and then.  But as always, even these strongly held beliefs can change in a literal "NY Minute."  So be ready to act.