MBS LUNCH: Considerations for Next Week

MBS QUOTES HERE...

(Yes we have a new page on MND...and its devoted to you!!!! Delayed MBS quotes, live TSY quotes, Housing Data, and LIVE PRIMARY MORTGAGE MARKET DATA TOO!!!!)

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As the debris from yesterday's implosion has settled activity in the TSY market has perked up a bit. Ahead of the long weekend benchmark buyers are covering their open short positions (profit taking) while other accounts strategically reposition themselves  (long/short...mostly short) ahead of the Treasury Department's auctioning of $101bn in 2 yr/5 yr/7 yr notes next week. The likely large amount of open short positions leaves the 10 yr note vulnerable to a further rise in yield before a short covering rally ensues...for now the range should moderate losses but we aren't ruling out complete chaos in the benchmark market...as in 3.50% on the UST10YR is a possibility (thank you Bill Gross for questioning the United States AAA credit rating....now there is a fundamental and technical bearish tone cast over the yield curve).

The bad news behind us...onto MBS where the Fed has proven themselves time and time again. When TSYs sell, the Fed's SOMA has held "rate sheet influential" MBS coupons relatively stable. The question is now are we heading into a new paradigm of higher mortgage rates.The steepening yield curve (UST10YR yield at 7 month high) means the possibility of higher mortgage rates is indeed on the table. The recent rise in rates is a function of influential headline news and a general willingness of the market to test the fortitude of the Federal Reserve. It is time for the Fed to step up and realign the market's perception of their intentions. The Treasury is definetly not done borrowing money and the US Economy is by no means "out of the woods" (SEE FOMC Minutes)....that said you make the bet...DO YOU THINK THE FED IS GOING TO LET THE MARKET PUSH THEM AROUND? Doubtful...

As many of you may be floating some last minute monthly closings into next week...it is time to offer up some guidance. For now the price levels of MBS coupons warrant better rate sheets...meaning lenders have some room to cushion the possibility of a further steepening yield curve...and we all know if they want business they will have to contend with the broad borrower perception that mortgage rates should be lower....time to share the love lenders.

The FOMC's mandate to boost housing and household wealth via lower borrowing costs has indeed served its purpose thus far...but has no way run its course as there is still $769,000,000,000 left in the Fed's MBS account.

So to lock or float into next week?

If you are still floating loans that are expecting to close before the end of the month (purchases mostly)...we hope you have taken enough profits off the table to justify the risk of floating into next week as rate sheets have been PUNISHED over the last 24 hours and locking at this point is essentially handing lenders an extra 50bps of juice (margin). If you havent locked...rest easier on the fact that the majority of the TSY market is short heading into the weekend. This implies next week they will need to cover these positions...pushing yields lower and sparking a potential face melting rally in the currently bargain basement priced "rate sheet influential" side of the MBS stack. Obviously we are going out on a limb here because anything can happen...but we are betting on the RANGE MODERATING losses and PAR-NERTIA exerting its forces on the FN 4.0.

FN 4.0 stable all while the 10 yr TSY note yield has steadily risen....thank you Federal Reserve

PS....End of month MBS supportive events to come too!