MBS LUNCH: Reprices for Better a Possibility
The 10 yr TSY note has aggressively tested the 3.83% support level six or seven times this morning...and only once did support fail to hold. Immediately following the breakout...yields fell precipitously. If this continues, the bearish technical bias will shift more neutral and we will begin to look towards the mid- 3.60s for the next resistance points. This is progress....
While our directional guidance giver (UST10YR) has been successfully passing its technical tests this morning...the FN 5.0 current coupon has staged enough of an intraday rally for us to say...YOU COULD/SHOULD BE GETTING A REPRICE FOR THE BETTER!!! YAY.
Whats Causing This?
Econ data was nonevent this AM. Some say dollar supportive statements from Japan's finance minister ("unshakable" support) has helped add momentum to the flattening yield curve. Others point to the extension of the Barclays Index as the cause for the street's increased duration appetite (willing to buy "rate sheet influential" MBS...those accounts are small part of MBS market though). Perhaps it could be the story reported by the WSJ that the Federal Reserve was not likely too add significant funds to their TSY/MBS purchase programs (less government intervention = good thing from street's perspective).
EH....PICK YOUR RUMOR. We dont give much credence to any of those explanations though...
MBS coupons are rallying because TSY auctions are over, dealers got the high yields they wanted, and now traders are basking in a TSY supply-less sunlight (FOR NOW). Technically, in terms of MBS, real money accounts (banks, pension funds, insurance companies) are all moving "down in coupon" as extension risk is exhausted and their portfolios have a need to adjust duration gaps. Adjust what?
Real Money accounts need to match the duration of their liabilities to the duration of assets!!! To do so they move "down in coupon" into a security that has a longer duration. These balance sheet adjustments are occurring because the yield curve has flattened out over the past 24 hours..unfortunately these positions can/would be rapidly reversed if the yield curve steepens up again. WHICH IS EXACTLY WHY WE SAY WE REMAIN DEFENSIVE!!!
We will say this though...we are in a grey area....some sort of shift in sentiment that may help us locate a clearer range and move sideways (3.63 on 10 yr is my outlook). We will be watching the street's preference for yield curve steepeners vs. yield curve flatteners. You want flatteners as it extends durations and allows account to move "down in coupon" ...helping rate sheets improve.
ANYWAY...I think you get the point. SHORT TERM TECHNICAL TRADING STRATEGIES STILL MODERATE THE BROAD BASED BIAS. THE STREET REMAINS DEFENSIVE, AND SO DO WE. We are however seeing a shift from bearish yield curve steepening to a more neutral outlook on rates, this is progress.
For new readers (or longstanding) looking to gain a better understanding of WHAT THE HECK I AM TALKING ABOUT (I know I have been very technical lately...but its necessary to illustrate what is moderating market flows)....you can read THIS to start.
PS...there is high likelihood of profit taking in MBS and TSYs at the moment. STAY ALERT. FAST MONEY ACCOUNTS LOOMING...
PPS... lots of talk about lenders being quick to reprice for worse/slow to reprice for better. Well let me add some perspective to that...
From December to late April lenders baked in a huge amount of margin into rate sheets. Primary/secondary spreads were over 100bps. (MBS current coupon was 3.70s/Rate sheet current coupon was 4.75). In May, when the yield curve began moving agressively steeper and MBS prices started to tic lower...lenders progressively reigned in rate sheet margin ("juice").
Today, the primary/secondary spread is around 30-40 bps....depending on the conduit in which you sell your loans (broker or banker). That is some considerable tightening...to the point where lenders cant pass thru much more relative to MBS gains....hence, slow to reprice for better. I am sure you can guess why lenders have had to reduce the amount of juice they were baking into rate sheets. Anyone care to explain?