MBS MIDDAY: Rally Rally Rally Time
Ooo Rally Time. So Just Sit Back And Unwind.
School may not be out, but something else is providing that "sort of a buzz" foretold by the fresh prince, and it's our favorite kind of drug: an MBS rally.
Take a look at the stack:
Since 5pm "Going Out" Marks....
FN30________________________________
FN 4.0 -------->>>> +0-16 to 99-27 from 99-11
FN 4.5 -------->>>> +0-12 to 101-19 from 101-07
FN 5.0 -------->>>> +0-11 to 102-19 from 102-08
FN 5.5 -------->>>> +0-08 to 103-12 from 103-04
FN 6.0 -------->>>> +0-10 to 104-21 from 104-12
GN30________________________________
GN 4.0 -------->>>> +0-17 to 99-27 from 99-11
GN 4.5 -------->>>> +0-12 to 101-25 from 101-13
GN 5.0 -------->>>> +0-10 to 103-06 from 102-28
GN 5.5 -------->>>> +0-09 to 103-25 from 103-17
UST10YR: 3.217% (19 ticks better in price, .07 lower in yield)
2s/10s: 229.2 bps
DOW FUTURES : -129.4 ti 8454
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Very nice.
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This, of course, makes for happy charts as well as evidenced by the following showing the slow steady MBS rally on top and the sharp AM drops in tsy yields and stocks followed by some sideways movement on the bottom.
This rally is not overblown either from a spread sense. As the broken record foretells, when treasuries rally, MBS rally a little less. So despite the nice half point gains in 4.0's, comparable duration treasuries are closer to gaining a full point today. The 10 yr is up 25 ticks for example.
The happiness doesn't end there though. Recall last week, on Friday, we finally broke the long term floor represented by the gray line below. As we often discuss with respect to technical analysis, a broken trendline doesn't mean nearly as much on the day it breaks compared to the price action the following day. If we were to hold below that line today, it would be called "confirmation." In short, what we're seeing on the day over day chart at the moment is anything but confirmation. Take a look:
Of course we'll be careful about giving too much weight to technicals, but it's just another chip in our pile should the fundamentals driving the market remain positive. So what are the fundamentally positive events leading to today's treasury and MBS rally?
This particular chain of events began with our own musings that benchmark rates might be getting a bit high for Dr. Ben. This wasn't our idea of course, but we liked it, and it made sense to us given the previous assertions of the Fed regarding mortgage rates and the specific mention of "spreads" in certain fed speeches. Different folks pegged the number on the 10 yr treasury as different places by way of a "comfort zone." Some thought 3.0, some thought 3.08, while others a more lofty 3.25. Since no one had to wonder which one would be tested come friday--as yields superceded all those--the musings turned into more of a half-panicked expectation of action.
Then an article with the following title was emailed to me by one of my savviest colleagues, Rob Clark, who seems to be waiting for bond news nigh on 23.8 hours a day: "Mortgages Over 5% Mean Fed Purchases as Bonds Slump"
The article carries on the discussion on whether or not the Fed would step in given the desultory events of the past week. In short, numerous analysts and spokespersons from investment firms were quoted as saying it was time for the fed to step up their treasury buying for several reasons, not the least of which being to provide a lower basis for MBS.
This morning, the markets had a chance for some empirical evidence on this topic by way of fed treasury buying news. Long story short, "they bought more." In fact, they bought almost a third more than last time, quite an uptick, but perhaps not uber-impressive as the jump was only from $2.5 bln to $3.5 bln. In total, $10.426 was offered. This puts the hit rate over 30% which is quite a bit higher than previous outright coupon purchases. This, perhaps even as much as the increase in buying, is driving the treasury optimism this AM. Interestingly enough, when one examines a breakdown of the maturity years and amount bid, one sees a concentration in "mortgage paced" treasuries. Here's a quick break down.
I think the fact that the bulk of the buying was focused in the 7-10 yr maturities, which coincide almost perfectly with the durations of production MBS, is allowing MBS to keep up with treasuries to a slightly greater degree than normal today. There's not really academic support for this, other than to say this: without having any specific dealings with MBS today, the NY Fed is still showing their hand by the tsy's they purchase. And their hand is good for MBS. It's this both tacit and explicit commitment to MBS, not treasuries, that are two of the many components helping MBS continue their frenetic tightening so far this year. From a more academic perspective, this buying also takes some extension risk (discussed last week) out of the picture, which also benefits out production coupons.
However you account for it, it's a good thing. Now just sit back and unwind , er uh... I mean wait for those reprices for the better which are certainly on the way.