MBS Live Morning: Still Under Pressure; Which MBS Coupon Now?

Last week saw bonds sell off at their fastest pace in at least 9 months on a combination of a hawkish pivot from the Fed and paradoxical omicron optimism.  Corporate bond issuance and looming Treasury issuance added to the selling sentiment.  Last but not least, it's not uncommon to see a big, random move at the start of a new year.  If that random move coincides with the underlying trading motivations, the result can look a lot like last week. 

The following chart shows WEEKLY Treasury candlesticks as well as the new overhead pivot points brought into view by the move.

All of the weakness has raised questions about which MBS coupon we should be watching now.  The easy answer until further notice is UMBS 3.0.  Here's why...

Without digging too deeply into the math underlying mortgage rate setting, one of the most useful things to remember is that note rates are at least 0.25% higher and not more than 1.125% higher than the MBS coupon to which they are ultimately assigned.  In other words, 3.625% is the maximum rate that could be securitized in a 2.5 UMBS coupon (3.625 - 1.125 = 2.5).

As of this morning, 3.625% is a starting point for many lenders' best case scenarios.  That makes 3.0 a much more flexible coupon as it can hold rates between 3.25% and 4.125%