MBS UPDATE: NOT PRICE UPDATE!!!
3PM MARKS
FN30_______________________ GN30__________________________
FN 4.0 -------->>>> +0-07 to 99-09 GN 4.0 -------->>>> +0-02 to 99-13
FN 4.5 -------->>>> +0-06 to 100-21 GN 4.5 -------->>>> +0-09 to 100-25
FN 5.0 -------->>>> +0-06 to 101-21 GN 5.0 -------->>>> +0-05 to 101-28
FN 5.5 -------->>>> +0-05 to 102-10 GN 5.5 -------->>>> +0-07 to 102-15
FN 6.0 -------->>>> +0-00 to 103-01 GN 6.0 -------->>>> +0-10 to 102-31
NEWS____________________________________________________________________________________________________________
THE BEA REPORTS THAT ADVANCE Q4 "Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 3.8 percent in the fourth quarter of 2008, (that is, from the third quarter to the fourth quarter), according to advance estimates released by the Bureau of Economic Analysis. In the third quarter, real GDP decreased 0.5 percent.
Consensus: -5.5%
Actual: -3.8%
Excluding Inventories: -5.1%
THIS JUST IN...Our economy did crappy in the fourth quarter!!!!! Everyone panic....this was the biggest output deterioration since 1982 (according to Bloomberg). Haha sorry the wretched reports are just expected at this point...thought I might have a little fun with the whole "foulness" of the economy. Did you notice the data was better than expected and the Dow still sold off? Market participants did indeed fade the press release.... this was just advance data and the BEA reminded that..."the fourth-quarter "advance" estimates are based on source data that are incomplete or subject to further revision by the source agency. In terms of the effects on MBS.... contracting economic activity.....down trending aggregate demand.....falling home/asset values....to ALL OF THAT negativity...I respond with this:
"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets"
The Fed is here. They are here to stay. Until at least end of 2Q '09....and even then they "stand ready to expand" (that means THEY WILL BUUUY MOOOOORE MBS IF NECESSARY!!!!!)<-------yelling. We know rates have gotten worse lately, but we also know lenders have been hiring. We know they are training and we know there are still lenders issuing aggressive rate sheets (the richest rate sheet requires the most pristine of files.) Unfortunately many of you are exposed to rates with "juiced in" bank margins and management haircuts. So the herd is generally down in the dumps (with good reason)...your rates have incrementally risen over the past 10 sessions...but then again so has the yield curve. PLUS the past couple days have been a roller coaster ride... so in general everyone is a feeling a bit worn out from that as well. Remember the MBS cheat code? (UP Up up down doWN dOWN DOWN SIDEWAYS SIDEWAYS DOWN DOWN DOWN).
Naturally this leads us to the big concern/issue/hullabaloo....WILL THE REFI BOOM EVER HAPPEN????????
Ok. I am going to go out on a limb and pull out the old crystal ball again.
DEEEEEEEEEEP INNNNNHAAAAALEEE. HOOOLD IT. EXHALLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLEEE
YES I TRULY BELIEVE THE REFI BOOM IS REALLY GOING TO HAPPEN!
One Simple Reason.....
"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets"
Remember: $430bn more dollars will be spent on MBS in the next 5 months and that doesnt even include what the GSEs and Treasury Department are expected to purchase.
Well yesterday we found out that.... in the last weekly MBS purchase report the Federal Reserve completed $16.836bn MBS transactions. Of that $16.8bn they spent $7.190bn on Fannie Mae MBS. 42.71% of that $7.19bn bought FN 5.5s ($3.07bn).
Two questions arose from this statement.
1.WHY IS THE FED BUYING LESS AND LESS MBS?????
AND
2. IF THE FED IS TRYING "TO PROMOTE THE RESUMPTION OF SUSTAINABLE ECONOMIC GROWTH"....WHY ARE THEY BUYING UP IN COUPON???? WHY SO MANY FN 5.5MBS LAST WEEK????
No really we are asking you to tell us....I wrote the answer out already. We want to hear your theories. Don't be shy. No worries MBS are a complex topic...different answers only add perspective!
THIS IS NOT HOMEWORK. JUST AN INDUSTRY ACTIVITY. REALLY.... DON'T BE SHY!!!
P.S: HINTS
HINT # 1...
HINT # 2....
Hint #3
Relative Value. Relative value is a method of determining the attractiveness of an asset in terms of its risk and return compared to another asset's risk and return. In the MBS world we determine relative value by comparing the yield of a specific MBS coupon to the yield of the risk free benchmark Treasury security of similar maturity. This comparison is made by subtracting the yield of a Treasury security from the yield of an MBS coupon. In our writing these comparisons are stated when we refer to "spreads". You have read terms such as "spread tightening" or "wider spreads".... I like to say ""gappy" or "gapped out".
Hint # 4....