MBS MORNING: Now What?
Fn 4.0-> -0-00+ to 100-03+ Gn 4.0-> +0-02 at 100-03
Fn 4.5-> -0-02+ to 101-13 Gn 4.5-> -0-01 to 101-18+
Fn 5.0-> -0-01+ to 102-13 Gn 5.0-> -0-02 to 102-19+
Fn 5.5-> -0-01 to 102-31 Gn 5.5-> -0-01+ to 103-04
Fn 6.0-> -0-00+ to 103-16+ Gn 6.0-> -0-00+ to 103-14
Yesterday the festive celebration of hope did not breed broad optimism in capital markets. Instead concerns over global economic weakness overshadowed bright prospects for political "CHANGE". This general disdain for risk was evident after the UK government used their "invisible hand" to waive a magical "government guarantee" wand over UK bank balance sheets. Global Equity markets followed US stocks into the red overnight and guess what? The flight to safety trade (Treasuries) didn't happen! Why? Well for one...Obamanomics (Matt says he coined this term) will require more government spending...stimulus packages and a possible "Resolution Trust Agreement" type asset purchase program (buy toxic assets off bank balance sheets). How do you pay for this spending spree? Issuing more government debt!!! So with an expected increase of TSY issuance (more supply of TSYs) many market participants will be short the yield curve.
What does this have to do with the MBS? The Fed's QE efforts have insulated the MBS market from its fixed income cohorts, we feel a bit disconnected from some of the protectionist induced yield curve flattening. Spreads (MBS vs. TSYs vs. Agencies vs. Swaps) however remain indicative of "where and when" (what coupon) the Fed will place bids within the stack. This is important right now because we feel that MBS bids are stuck. The actuality that lenders are prohibiting production of thinner coupons (not offering lower rates) has set in on analyst and trader quantitative models, this lack of a transparent prepayment outlook has created a multiplier effect of uncertainty. So until mortgage bankers re-align primary/secondary spreads the MBS stack will fluctuate in a tight range (further discussed below).
Like every other day, the Fed remains an MBS buyer, however the unknown prepay variable is exhausting other MBS investors. Yesterday as originators sold forward commitments to deliver MBS (hedging/protecting profits) the Fed appeared to be one of the only buy side MBS market participants. Some real money bids were reported but for the most part the worn out MBS bid seemed willing to let the stack sink lower in prices. If lenders aren't going to tighten primary/secondary spreads...MBS investors may take the responsibility upon themselves. But remember...sell offs present a bargain buying opportunity...so once again we do expect a tight MBS trading range.
This morning trade activity has been light. Overseas bids have failed to offset the insignificant offering of MBS supply from mortgage bankers. In general there is a feeling that all markets are searching for new direction....equities have room to go higher but convictions could be described as anxious at best, we are short TSYs ahead of more supply, and feel like we are due a "down in coupon" buying bias in the MBS market. That said we are hopeful for higher MBS prices and better investor rate sheets (fundamentally at least...we can only get so in detail about operational efficiencies at lender ops centers). There is however room for MBS investors to force the "delivery issue" (provide lower rates to borrowers) with lenders so "uninterested/exhausted" MBS bidders may just decide to let the Fed sort out the mess while mortgage originators get their ducks in row. Translation: short term floating is risky but we are anticipating improvements any day now (purely based on recent relative value trading strategies).
Read the blog we posted last night for some pipeline management strategies...