MBS MORNING: How Cheap is Cheap Enough?

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Stock markets are rallying this morning following Wells Fargo's release of their preliminary first quarter earnings. Wells Fargo tells us they earned 0.55 per share or $3bn in the first quarter of 2009. This means money is moving out of TSYs and MBS is under some selling pressure. Buyers will nonetheless continue to "buy on weakness"...the problem now becomes how much cheaper will MBS prices get while stocks are feeling optimistic about "better than expected" earnings releases?

By the way the relaxation of mark to market accounting policies will have some effect on 1Q  earnings. Oh and I should remind that analyst's accuracy when predicting earnings over the past few quarters has pretty much been terrible...so expectations are essentially "best guesses" because no one, not even the Treasury, knows what banks are worth at the moment. (Sorry for the jaded perspective...I just feel like its important to remind that legacy assets are making it impossible to  know if balance sheets are accurate)

Anyway the yield curve is steeper and MBS bids are being left to "cheapen up"....this may cause some investors to delay the release of their rate sheets a bit. There is a possibility that some lenders may be pricing better than you expected due to that fact that prior to allocations (settlement) many lenders had already rolled their commitments forward to May delivery.... so current rate sheets may reflect previous MBS trading sessions. Other lenders may look to take advantage of the misconceptions that many primary market participants have regarding the connection between past MBS prices and their effect on current rate sheets. (Some lenders locked in pipeline profits already!)

This means you will lose some bps this morning which I suspect will make you less willing to lock...especially when you consider the resiliency of the mortgage market lately. The Fed provided liquidity has created a predictable trading range and allowed traders to boringly play the market with high efficiency and high profitability.  Remember tighter spreads are good...even if bids are moving lower. Unfortunately, at the moment, spreads are wider in production coupons but that has something to do with the price function of coupons trading near par...READ MORE ABOUT CONVEXITY FOR A BETTER UNDERSTANDING.

Either way we remain at the mercy of spread trading which is driven off the flow of money from stocks to benchmark bonds. Currently money is flowing out of bonds back into stocks and MBS is loving the chance to cheapen up a bit....Rate Sheets are worse...boohiss!

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