MBS CLOSE: Quarter End Approaches, Expected Results Ensue...
Even the top of the heap gurus that we're lucky enough to get color from lamented the volatility in MBS today, and it's seeming departure from any semblance of expected behavior. With respect to the current price levels in tsy's being on the edge of technical significance, but the time the end of the day rolled around, they hadn't gained enough to meet those tests. However, they'd gained enough to avoid a negative reading as well, meaning more "limbo." MBS gained fairly well and gave most it up LATE in the session.
I have to tell you something that might not make sense looking at the charts above: these price actions here at the end of day are as close to inconsequential as they come. Why? Given quarter end next week + Friday afternoon, not only was late day volume incredibly light, but for reasons already discussed, treasuries get the love this week. All things being equal, once quarter end rolls around, we'd have gained right along with tsy's modest gains today. But as it stood, spreads blew up which would almost always signal value buying is on the horizon. But (deja vu) that tightening will likely have to be after quarter end if it's to occur in meaningful amounts. Perhaps even better than the verbal explanation of this PM's inconsequential nature, understand that the y axis ranges here are VERY narrow. The best way to show this is to zoom out to a daily view of MBS to see how extreme today's downtick was...
See that teeny tiny little downturn right at the very end? Yep, that's us today... Not so scary now right?
Look, I know you don't really want to hear this, but it is what it is... Today was pretty much a wash in terms of guidance... In other words, no real suggestion of post-quarter end movement was made. Even that which would normally give us some idea is out of the picture. On the one hand, quarter end and profit-taking can hurt relative demand a bit and increase selling pressure respectively. On the other, it's "happy week" for MBS now with Class A settlement looming and the other trappings of moderate positivity normally associated with the coming of a new month. To add a little more spice to the mix, a new prepayment report will begin to exert it's effects on movements along the coupon stack come Wednesday AM. The safe play would be a lock predisposition for anythin uber-short term. If you're waiting until Monday AM to make that call, I'm with you. From there, it's a mixed bag as to whether or not you wait to see how the end of June and Class A settlement go before locking more. But for longer term stuff, I'd probably want to see a break below a few price levels that are currently too far below us to be a threat. Whatever gameplan is applied, it'll be better informed by next week's action. So until Monday!
2s vs. 10s: 242bps