MBS LUNCH/ALERT: Rates Moving Higher...Again
Rate sheet influential" MBS coupons are once again falling victim to a steepening yield curve and increasing fears extension risk. Rate sheets are indicating a perfect borrower will find it difficult to receive a 5.00% mortgage rate.
We have not lost all of last week's post "Black Wednesday" recovery but we are nearing those price levels...
Where to go from here?
The 3m/10yr MBS volatility proxy is up 18 bps at the moment. This implies the market has a very wide set of expectations for future interest rates.This is a function of the marketplace walking a "tightrope"...recovery or no recovery. Fixed income investors are pricing in a greater feeling of the unknown.
Why?
The bond market is falling victim to increasing confidence in the stock market (starting with stronger than expected consumer confidence data last week)....an optimistic outlook not even the bankrutpcy of GM could shake. No matter what the Dow is telling us...the fundamental question still remains unanswered....
HAS THE ECONOMY REALLY TURNED THE CORNER? Are we in full on recovery mode? Or have the short term tactics of the Fed only stabilized/helped to avoid Great Depression?
Higher volatility is telling us that the fixed income market isnt sure about the answer to that question. Yield curve investors are however skeptical that the rally in stocks has no conviction behind it....so investors cover their proverbial tail with some option buying (volatility)..as a "just in case" (in either direction) play.
If the economy is already recovering...the bond market is justified in forcing the Fed to address the long term intended and unintended consequences of "printing money" and monetizing debt. But, if the macroeconomy has only avoided the worst case scenario and a long, drawn out recovery is in store...then today's huge sell off will be viewed as OVERSOLD and the cheap prices will be eaten up briskly by bargain buyers.
So much is dependent upon the release of Non-Farm Payrolls data on Friday. A print in the "better than expected" range could cause chaos in the bond market...MBS prices would fall below "Black Wednesday" levels as the 10 yr yield approached 4.00%. In that event...well we would be in quite the predicament as the world begins to question the US's ability to raise money/pay back debts....stock markets wouldnt like the higher taxes that would be necessary to help offset a rise in borrowing costs.
Puts it is...