MBS MORNING: G7 AND ERRATIC INVESTORS
1300 marks...
FN30__________________________________
FN 4.5 -------->>>> +0-11 to 101-03 from 100-24
FN 5.0 -------->>>> +0-09 to 102-05 from 101-28
FN 5.5 -------->>>> +0-07 to 102-22 from 102-15
FN 6.0 -------->>>> +0-03 to 103-11 from 103-08
GN30____________________________________
GN 4.5 -------->>>> +0-11 to 101-18 from 101-07
GN 5.0 -------->>>> +0-13 to 102-27 from 102-14
GN 5.5 -------->>>> +0-08 to 103-05 from 102-29
GN 6.0 -------->>>> +0-00 to 103-16 from 103-16
Good Morning. Last week MBS performed adequately enough to persuade lenders to pass along enough rate reductions to sway some weary borrowers off the "waiting game" fence.
The feeling around global markets this morning: AHHHHHHHHHHHHHHHHHH!!!!!
So far fears of impending global doom and economic chaos have pushed safety searching investors into the US Treasury market, stocks are selling/have sold across the globe, and the yield curve is being flattened by a herd of anxious investors (flatter: longer term TSY maturities rallying). The G7 meeting over the weekend left an ominous cloud looming over the financial marketplace.
Here is the Statement of G7 Finance Ministers and Central Bank Governors <---CLICK ME
Here is my summary using excerpts from the statement...
"We, the G7 Finance Ministers and Central Bank Governors, met today amid an ongoing and severe global economic downturn and financial turmoil... we reaffirm our commitment to act together using the full range of policy tools to support growth and employment and strengthen the financial sector......What started as financial turmoil has now gripped the real economy and spread throughout the world. The severe downturn has already resulted in significant job losses and is expected to persist through most of 2009.....we welcome China's fiscal measures and continued commitment to move to a more flexible exchange rate... We reaffirm our shared interest in a strong and stable international financial system.....Increased collaboration between the IMF and the expanded Financial Stability Forum (FSF) will be particularly important to develop a timely and reliable assessment of macro-financial risks...."
Here what the United States had to say about it all.... http://www.ustreas.gov/press/releases/tg27.htm
<-- Statement by Secretary Tim Geithner - As Prepared for Delivery
Following Meeting of the G7 Finance Ministers and Central Bank Governors Rome,
Italy
My summary of Geithner's prepared statement..using excerpts
"These are global challenges and it is imperative that we work together to address them. Effective global response will require sustained action by governments working with the international financial institutions.... Governments and central banks are already acting throughout the world to provide substantial support for global economic recovery.....these actions must be forceful and sustained for a period that matches the likely duration of the crisis... Alongside these actions, governments need to continue to act to stabilize and strengthen financial systems and restart the flow of credit....All countries need to sustain a commitment to open trade and investment policies which are essential to economic growth and prosperity..... President Obama will soon sign into law the American Economic Recovery and Reinvestment Plan, which will lay a foundation for economic recovery with a powerful mix of investments and tax cuts to create jobs and strengthen our long term growth potential.... This framework is designed to provide greater transparency to the financial system, to bring in new capital, new financing to restart the flow of credit to consumers and businesses, and create a new investment fund to finance and leverage private sector capital to facilitate the clean up of bank balance sheets. In the coming days we will announce a comprehensive plan to address the housing crisis... While this is a responsibility of national governments, our markets are global and therefore national efforts cannot be fully effective without stronger international cooperation to implement higher standards.... I want to emphasize that an important part of this effort is to protect the international financial system from illicit finance. We must continue to work together to reduce the vulnerability of the system to those who would seek to abuse it for criminal or terrorist purposes....
Notice a Theme?
Timmy G MANNED UP and said everybody better support us!!!! (respect TIMMMAAAYY (not T.Duncan))
Here is how Japan reacted: BY DRINKING<<<---CLICK FOR DAILY HUMOR . Those poor souls are stuck in deflation. They cannot escape it. Finance Minister Shoichi Nakagawa said he will resign amid accusations he was drunk at that G7 press conference
So accordingly, the generally downtrodden financial news set off a world wide sell off of stocks and massive flight to safety.
Dow Jones and Dow Jones World Index. Down = Bad
Bond Yields
For MBS... runaway Treasury yields are not helping to rejuvenate the "up in coupon" profit taker's strategy. Remember from the "up in coupon" breakdown blog posts that market participants don't particularly favor expensive MBS prices because although prepayments are thought to have continued to slow, there is always that little feeling of uncertainty that more borrowers than expected decided to pull the trigger and" take what they could get while it was still available" (4.75 at 30 yrs is not bad right borrowers?). (Food for thought: Instead of one big "it that shall not be named"....will there be several mini waves of borrower refinancing? <---CLICK TO DISCUSS
DID YOU LOCK LAST WEEK? <---CLICK TO TAKE SURVEY AND COMMENT
Expensive prices are bad because when you buy MBS at 104.000 price you need to ensure you collect cash flows long enough to recover the 4.00% premium you paid for the investment. You don't get back 104.000 price when borrower prepays...you get 100.000 price. Negative cash flows = bad for portfolio.
You might also have noticed me talking about increases in supply being the wrongdoer behind for reprices for the worse. This implies that when interest rates get better and you decide to lock your loan that mortgage banks are not slow to follow. They are just as nervous as you are about changing rates because mortgage banks sell forward way bigger amounts of MBS (sell in the TBA Mortgage Market). Mortgage Bank pipelines are much more sensitive to interest rates changes compared to loan officer pipelines...do the math on 102.000 YSP at 100,000 vs. 10,000,000.
The market has reacted to these days of "originator dumping" by quickly lowering their bid...which has resulted in some erratic investor pricing strategies and reprices for the worse. As long as the -up in coupon/selling into supply/buying on weakness strategy- remains in effect....so will the anxious investor pricing strategies....that is unless they made enough margin over the last few weeks to cushion the brunt of any sell-offs (doubt it). Based purely on investor rate sheets, primary mortgage rates seemingly improved more than MBS prices last week...so lenders are gaining on MBS a bit. But there is more profit taking in the future so....once again I feel stuck. The stack is stagnant.
The Federal Reserve remains our "crutch to lean on" though...they are soaking up the excess Mortgage Banker supply and restoring stability to the MBS market. Be thankful the Fed is keeping the stack relatively compressed... (buying 4.0s and 4.5s). Without the Fed it would be difficult for mortgage lenders to offer rates below 5.00%
Rate sheets better today....spreads in the short side of the stack have slipped wider into the half a point range while fuller premium coupons are only being modestly outperformed by the yield curve.
NEXT...