MBS LUNCH: Playing Follow the Leader Again
Originators and borrowers alike are enjoying a corrective rally in the fixed income market today. New and improved rate sheets have indeed been reported following a sizeable rally in both the Treasury and MBS market. However, as the day has progressed the momentum behind the previously pointed out "facemelter" has stalled and a shift sideways has ensued around the 3.72% yield level on the 10 yr TSY note.
This morning MG explained that gappy (wide) yield spread levels were likely to add fuel to any rally that took place in the MBS market. That assessment was correct, unfortunately at this point yields spreads have contracted (MBS yields fell faster than TSY yields) to the point where market participants are less interested in moving "down in coupon". Translation: compared to TSYs, MBS look to expensive at the moment...in order for the FN 5.0 to continue to rally we will likely need to see the UST10YR break through 3.72% support levels...and hold. So while we were slightly detached from the behavior of TSYs this morning, the MBS stack will receive its directional guidance from the gyrations of the yield curve.
+110/10yr is the current range we would expect to moderate "rate sheet influential" MBS gains...
Since yield spreads (the difference between the yield on the FN 4.5 and the UST10YR) have reached the +110/10yr range we have seen a slowing to the pace of the "down in coupon" in favor of the fuller side of the coupon stack where 105 handle premiums are now low 104s...6.0s and 6.5s to be more specific. Once again...this illustrates the market's lack of concern/respect for prepayment risk as "credit impaired" MBS coupons (6.0s and 6.5s) are unlikely to qualify for a new mortgage for a variety of reason including but not limited to: low home equity, no job, less pay, tighter lending guidelines, HVCC, no SIVA products for the self-employed (yeh yeh there are a few lenders who will write SIVA..only a handful though), LLPAs, terrible credit (FICO system needs another update), etc, etc, fill in the blank, etc, etc!!! ETC!!!
In regards to "reprice for the worse" worries (we know how shell shocked you are) profit takers are not a big concern in regards to reprice for the worse worries as flows are a bit slow, spreads have already gapped out, and TSY traders are searching for new guidance while hesitantly keeping a neutral outlook. We remain optimistically defensive...a continued rally in benchmark yields should lead MBS prices higher and tighter to the yield curve as market participants add duration....helping mortgage rates move lower.
That said...lenders have made a strong effort to remain competitive over the past two weeks (primary/secondary spreads noticeably tighter)...they have done so by reducing the amount of margin in rate sheets. Don't be surprised, frustrated, or angry if mortgage bankers are less willing to aggressively pass along gains when MBS prices markedly improve. The nature of the recently rapidly moving rates market will force lenders to stay somewhat subdued (close to competitors) in regards to publishing aggressive mortgage rates. This is due to the fact that the duration of "rate sheet influential" MBS coupons can shorten or lengthen very quickly (not as bad as one might assume because of primary lending environment contraints...but participants will be quite cautious/quick to shed if necessary) which can either unexpectedly increase or decrease forcasted fallout.
Plain and Simple: lenders feel the same way you do right now....worn out from volatility.They are catching their breath, trying to make up lost profits.....looking for a more stable range to form. Primary/secondary spreads shouldnt go any tighter, if anything they will move wider.