MBS UPDATE: Is That Green?
YES its GREEN!
After some early session selling in the long end of the curve (we call the 10 yr the "long end"), the 10 yr TSY note has recovered a portion of yesterday's losses and begun to move sideways/even lower towards previously outlined resistance levels. Unfortunately, the volatile nature of the trading environment will likely force further selling ahead of the 30 yr long bond auction (benchmark buyers selling into strength still...sign of weakness). Let's bet on the 3.92/3.93 resistance level as a consolidation point. 3.90% will serve as intraday "strong resistance" level...
In the mean time, the FN 5.0 "current coupon" is staging a mortgage originator/floating borrower welcomed rally. Spreads are tighter vs. TSYs and swaps! Isn't it wierd to see green on the board?
But wait...here comes another "unfortunately"....unfortunately, just as 10 yr traders are likely to sell into strength, FN 5.0 buyers will do some profit taking of their own. <---this is me covering my butt from (JW) the volatile nature of the technical trading strategies that moderates progress in one direction or another.
Here is a longer time frame perspective...
This morning I said I wouldnt be surprised to see some bottom fishing in the discount side of the stack (long duration) as those MBS coupons are cheap dollarwise (93 handle on 4.0s) and negative convexity has become a foregone conclusion. Well... we are indeed seeing some speculative "down in coupon" positioning this morning. Any buying of these deeply discounted (93 handle) coupons is likely based on a "buy and hold" strategy from real money accounts looking to offset the duration of liabilities/obligations (zero duration gap). When talking about negative convexity...the FN 5.0s is a more likely victim of convexity selling. The convexity crowd is mostly servicers looking to sell their "current coupon" holdings to protect MSR portfolios (google it) from negative convexity. This is not an issue for coupons trading in 93 handle,
2s vs. 10s: 257bps
PS.... Primary secondary spreads are way tighter...did you notice that lenders are doing their best to fight off the steepening yield curve? Depending on the conduit you sell your loans through, your rate sheets primary/secondary spread is less than 50bp wide. Secondary current coupon is near 5.10% btw...
PPS...they better fight off the steepening yield curve after baking in over 150bps of juice from Jan-April!