MBS CLOSE: More Predictable Behavior From MBS

The MBS market has been predictable of late with UIC (Up in coupon) movements during treasury rallies and "down in coupon" moves during treasury selling.  Amid fresh treasury "supply glut" concerns, US treasuries gave back a decent portion of yesterday'sgains.  Treasury movements on the day wereas follows:

MBS fared much better by comparison, at least in lower coupons.  Again, this "down in coupon" behavior versus treasuries has been characteristic of sell offs recently.

FN30______________________________                

FN 4.5 -------->>>> -0-03 to 101-01 from 101-04                                      

FN 5.0 -------->>>> -0-04 to 102-02 from 102-06                                 

FN 5.5 -------->>>> -0-04 to 102-19 from 102-23   

FN 6.0 -------->>>> -0-06 to 103-06 from 103-12

Today saw the release of the Obama administrations's "Howmeowner Affordability and Stability Plan."  Based on details previously available, there was little by way of surprises, though Adam and I are working on a full write up of the salient points of this and other Administration/Fed Speak over the past 2 days.  The administration anticipates the plan to, in some way, help more than 7 million families, with slightly more than half of that "help" being in the form of refinancing.  Given the success with which government initiatives with similar goals in the past have played out, combined with the limitations of the plan (105 LTV max, no non-conforming refi's, etc...), it's unlikely this will have the desired effect, but that remains to be seen.

As far as the large portion of loans not falling under the GSE's purview, the idea there is to modify modify modify thanks to another 75 billion dollar initiative that would provide servicers with a thousand buck spiff for mods and another grand a year for five years earmarked for principle reduction (assuming the borrower stays current).  In addition, there's a 10 billion dollar insurance fund to protect servicers against future losses resulting from price depreciation.  The following is more of an "op-ed" sort of opinion, but how disconnected can the government be from the reality in the trenches?  On paper, it may seem like 6 grand for every loan over 5 years will help, but what have you guys been seeing in terms of underwater loans?  Am I the only one who is consistently hearing and seeing the negative equity problem as much more significant than that?!  Of the upside down clients I've spoken to recently who either wanted a short sale or refi, I'm hard pressed to remember a situation where 105 LTV would help them, or where I could conceive that a scant thousand dollar pot-sweetening would sway the servicer and/or investors decision when it came to a modification or work-out.  I suppose hindsight will be 20/20 on this as well, for better or worse.  As I said, we'll get into more details when AQ and I can finish our meeting of the minds.

There was some decent news for GSE's in and of themselves as well, though no marked reaction in MBS as a result.  The preferred stock purchase program courtesy of the treasury will be doubling, and their portfolio caps will be raised from 850 bln to 900 bln. 

After the plan was released and markets had some time to digest, it seems they "remembered" once again that the money for all this "stuff" has to come from somewhere--somewhere being spelled: Treasury Supply.  Consequently, tsy's sold, most steeply in the long end.  After some sturm and drang, the Dow managed to stay above the multi-year low it was within a point of yesterday, closing up 3 points at 7555.  Massive panicked technical and psychological sell-off averted--for today at least.  MBS showed some erratic behavior, with longer duration coupons (think 4.0 and 4.5) pressured by the duration shedding sentiments evidence in treasuries, but were also pressured on the shorter duration end of the stack (6.0+) ostensibly thanks to foreclosure workouts, etc, seen to hold some prepayment concerns for higher rate notes. 

Likely not helping (but perhaps not hurting much either) was the WORST EVER housing starts number.  We fell 16.8% to 466,000.  Consensus estimates called for 530k.  That's bad folks.  Real bad.  It wasn't nearly enough data today to compete with the government's headlines, including Gentle Ben announcing the FOMC would provide longer term forecasts, which today included accelerating desuetude in the form of a projected 2% GDP contraction versus a prior estimate for 1% growth.  The "bottom" of the mess is continuously being pushed into the future.  Unemployment too was revised up from "mid 7's" to high 8's.  One has to wonder where financial markets will be when the economy weakens further.  Is recent added intervention just an interim "bump" to prevent shell-shock?  Or are they overshooting to allow for optimism after a better than estimated reading?  You decide, but odds are on the former.

We get more by the way of scheduled data tomorrow:

• Initial Jobless Claims, calling for a 620k drop
• Leading Economic Indicators, projected fairly unchanged from last month
• Philly Fed Survey, calling for -25.0 from -24.3 last month
• TSY announcements for 2,5, and 7 yr auctions, estimated at just under 100 billion.
• Atlanta Fed's Lockhart to speak at 1:15
• And our favorite thursday occurrence when we get weekly MBS purchasing by the NY Fed.

You might as well copy and paste the concluding strategy comments from yesterday here as well.  Uncertainty remains certain.  Day traders continue to feel "safe."  Supply continues to be good.  Sellers continue to step in when profits are available.  The Fed continues to drive "down in coupon" while the rest of the market does much the opposite.  Day to day changes are more disconnected from tsy's, stocks, and data than they've been in recent memory.  And those MBS changes don't have the same degree of bearing on rate sheets as history dictates.  We ARE however seeing a gradual decompressing of the coupon stack in addition to some tightening (inch by excruciating inch) of primary/secondary spreads.  A secret and silent increase in staff among lenders combined with the notion that the government wants low mortgage rates continues to loom, fueling hope that the aforementioned spreads can tighten, MBS can get stable and tighten up to tsy's a bit more, and the economy can stay weak enough for the tsy basis to be low enough.  All the preceding leading to the promised land of mortgage rates.  Will it happen?  Probably.  AQ and I think so at least.  When will it happen?  I'm not touching that with a 10 foot pole.