Liquidity Issues Making MBS Look Bad

So much illiquidity this week... But what does that really mean?  Let's break it down...

There are buyers and sellers in the MBS market submitting "bid" and "ask" prices respectively.

Sometimes the bid prices get a little crazy for a variety of reasons.  These can range from actual people making actual decisions to computer programs erroneously calculating where bid prices should be based on other variables.  

In short, there are times when prices appear to instantly drop by large amounts without any justification in the news or any corroboration from Treasuries.  MBS Live runs our own algorithm that filters out most, but not all of this noise. 10:56am ET was one such time.

MBS prices appeared to drop an instant 3/8ths of a point.  Sellers never changed their "ask" prices, and a few minutes later bid prices were right back in line with previous levels.  As can be seen in the chart, this isn't the first time this has happened in the past few days.

It's also not a new phenomenon in general, which is why we've had knowledge base articles like THIS ONE for years.

Some crazy lenders actually reprice for the worse when this happens, even though they should not.