MBS UPDATE: WHATS HAPPENING???

First off. If you have not read the GUT-FLOP you really missed out on a hearty edumacation experience. Click on this link to READ IT

At the open yesterday we were optimistic that the current "up in coupon" (higher rates) bias was due for a reversal, this supposition was based on the expectation that opportunistic relative value "bargain buyers" would re-enter the MBS marketplace. Welp...that didn't happen! We did report that real money buyers and a Fed bid attempted to eat up excess originator supply unloading of 4.0s and 4.5s (this is a profit protecting strategy...just like you should be doing!!!) but it just wasn't enough.

The MBS market has been a net seller recently, rates have worsened which has resulted in a pessimistic period of fading prospects for prosperity. The Fed induced "down in coupon" journey we have been on over the past 50 some odd days has indeed stalled and a stagnant/slight "up in coupon" bias has settled in across the stack. The problem: the most important variable in the MBS price function (prepays) has become a guessing game. The Federal Reserve's endeavor to jump start the US financial system via housing has driven par bids deep into the throws of stack (as low as uppers 3's). Now the entire coupon stack is trading at a premium and lenders are failing to instigate a broad based refi boom. Translation: this quantitative inaccuracy (models that establish the value of MBS) has led MBS investors down varying relative value purchasing paths. Essentially capital markets went from 5.5 to 3.5 in about 7 minutes, in the process they failed to account for the fact that the slim and trim mortgage industry was not prepared for an onslaught of activity. We are hoping that you are beginning to take note of the significance/importance of the unknown MBS price function variable, prepayments...it's mucho importante!

Today those previously described "bargin buyers" have emerged. This supports our stance that the MBS market will remain in an opportunistic/speculative/at the ready trading range. The Fed will support low mortgage rates to the best of their ability and the MBS investor will remain poised for "down in coupon" purchases. I know I know everyone still wants to know when rate sheets will get better. The prepayment perplexity has presented a "what came first" dilemma (chicken or the egg). The "from 10,000 ft" foundation of a solution to this problem is MBS bidders need to stay "at the ready", once lenders begin to pass through juiced bps (margin) the REFI BOOM we have been expecting will have the fuel to re-ignite and prepayment behavior will be less erratic...then portfolio management strategies will become more apparent.

PS. We are exploring the price function of MSRs and its effect over investor price strategies. (static vs. OAS). We think we are onto a less publicized culprit of gappy primary/secondary spreads.