MBS CLOSE: All Quiet Before The Big Day

By: Matthew Graham •

MBS ended up gaining 1-3 ticks in the lower end of the Fannie 30 stack.  Though we saw a 12 tick spread between highs and lows today, the range trade throughout the day did not exceed a 4 tick spread.  All that said, I wouldn't even pay that much attention to actual price levels today as reality will not officially begin until after FOMC tomorrow.

Today began with reasonable positiveity for MBS as the range moved steadily upward.  But even before the 1pm 2yr Tsy auction results, the range took a negative turn which persisted through the 3pm close.  Since then, we've regained lost ground as Tsy yields have fallen back in line with the low range on the day.  Spreads widened out early and have held in a higher range the whole day and most of our movement in MBS can be traced back to our tsy benchmarks. 

Yesterday's theme of selling Ginnies continued to a very small extent as Fannies added on another tick or two thanks to selling from Asia. The remainder of the selling was readily absorbed by the Fed.

The 101-10 level at which Fannie 5.0's are ending the day are just a few ticks above the low that came after the first major selling spree in late May--the lowest point since the Fed started buying--almost as if to say, "Ok, we're all squared up to where we were before Fed buying first began changing prices...  Go ahead and hit us with your FOMC announcement tomorrow so we know what to do for the next 6 months."

Given the massive amount of time and space we've devoted to the "idea" of tomorrow's FOMC minutes, there is not much else to say, but here are the bullet points:

  • - Don't expect lenders to pass on much if any of today's gains as most will be conservatively priced until the FOMC turns on the defogger tomorrow.
  • - Don't read too much, if anything, into today's price movements.  As AQ expertly mentioned earlier, it has been all about a range leading up to tomorrow.  Think of it like a football team shuffling around to get in position during kickoff.  Tomorrow will be the first day the team can start to approximate the position of the ball, but this one in particular is known for taking crazy bounces once it hits the ground. 
  • - Wait as long as possible before locking any long term floaters tomorrow.  If things are negative to the point where there are certainties, we'll be sure to let you know.  Any other eventuality would suggest floating a bit longer than you think you need to as characteristically, post-Fed positivity can take days to materialize whereas negativity is normally much more immediately felt.
  • - Consider locking any uber-sensitive deals tonight as you're likely to have better pricing today unless there are some major gains before the Fed tomorrow.
  • - To a certain extent, let your own expectations be your guide.  If you know in your heart that "something's gotta give" for rates in the near future, or if you believe that the Fed et. al. understand the importance of keeping rates low lest the recovery be blown, be confident enough in that to weather tomorrow's potential uncertainty.
  • - Today's two year auction, on any other week would have been much better received than it was.  The tsy market was much more reserved considering the week's remaining auctions (which speak more to the "meat" of the yield curve) and more importantly, the landmark FOMC announcement tomorrow.
  • - Have everything ready to lock.  If we do, by some unhappy chance, have a clear indication of negativity tomorrow, it may be some time before tomorrow's rates will be available again.
  • - Don't ignore the AM data.  This might seem like an OK thing to do, but Durable Goods is a very important report and it can and will impact the markets, though it's overshadowed tomorrow.  If nothing else, perhaps the results can provide some sort of prelude to the FOMC announcment.  Keep in mind!  THEY ALREADY KNOW WHAT THE REPORT IS GOING TO SAY AND INDEED A COMPONENT OF TOMORROW'S STATEMENT MAY TAKE THIS REPORT INTO CONSIDERATION.
  • - Same goes for the 5 yr auction at 1pm.  In fact, any movement observed after the 5 yr auction should be viewed as especially important because it would mean that market participants are willing to take positions even BEFORE that which has caused so much indecision of late.  The 5yr auction results may well start a ball rolling in one direction or another paving the way for an equivocal FOMC statement to add to the momentum regardless of it's previous direction.


Many long stories short: be prepared and stay alert.  Just the electricity in the air from the gathering storm may be enough to make the entire day volatile and directional.  Everything means something tomorrow, so try to absorb and interpret as much as you can.  And whatever you don't care to absorb and interpret, we will, as always, do as much of that as we can on the blog.
On a final housekeeping type note: we expect tomorrow to be a busy day for AQ and me.  As such, it may not be possible for us to chime in when comments are requested or to even put out long and beautiful blog posts.  A majority of our time and energy will be spent making sure the "catch-pans" are not leaking.  In other words, we'll be on the phone with others and with each other making sure we're getting the most critical analysis to you.  In the case of tomorrow, this may mean shorter posts.  If you need to know how the market is moving, your best bet is the RATES PAGE, which has MBS prices updated with a timestamp.  Any analysis that is important to our mutual missions will absolutely be up as necessary!  So no news is good news unless otherwise specified!

Use tonight's comments section for any lingering questions, requests, or to make any off the wall predictions so that we can all come back to this later and either applaude or make fun of you!  It's for that reason, I'll probably leave my predictions out of it for now.  But given the markets fighting off a 4% yield in 10yrs of their own accord, I'd be surprised to see something blatantly and unexpectedly positive for MBS aside from the standard sort of "remains committed" verbiage...  What are your thoughts?  Hopes?  Fears?  Dreams?