MBS MORNING: Need Further Confirmation
First order of business...
Everyone give a warm round of applause to the FN 4.5 MBS coupon. It has endured some dark times on its road back to current coupon status, but has finally managed to break the back of parnertia.
This morning the FN 4.5 has showed resilience to higher TSY rates as the 10 yr TSY note is -0-20 yielding 3.38%, 8bps higher than close yesterday. When I say resilience I mean MBS/TSY yield spreads slightly tighter as MBS outperforms TSYs.
At the open prices were considerably lower, however since hitting the early morning low prices have rebounded, nonetheless prices are still lower compared to yesterday's 5pm "going out" marks. On a side note servicers are doing some convexity buying/adding duration to portfolios to adjust for the generally flatter yield curve (managing the duration of liabilities to duration of assets). This means servicers are buying longer life "rate sheet influential" MBS coupons today. A GOOD SIGN FOR FUTURE MORTGAGE RATES AND AN IMPORTANT PART OF THE "STARS ALIGNING"! (servicers are active hedgers, however they usually choose a more cost efficient option like swaps and TSYs....buying MBS is good for us)
Remember how the FN 4.5 just couldnt break 100-00 for the longest time? Well 101-00 is the new 100-00 until the yield curve flattens out a few more bps...
Why cant we sustain this rally?
Remember what we said about the stars aligning....stocks confirming bearish bias + bonds confirming bullish bias + lower interest rate volatility = less MBS convexity anxiety = BETTER MORTGAGE RATES
Well stocks still arent quite sure about their part of this equation yet. But they are getting closer and closer as each rally attempt fails and new lows are made.....and the bears slowly confirm their bias.
That said...although rate sheets are worse this morning. Mortgage rates are still better than they were when the day began yesterday.
DONT FORGET TODAY IS NOTIFICATION DAY!!!
Anyone care to tell the crowd what this means for Fannie Mae and Freddie Mac 30 yr MBS prices?
2s vs. 10s: 247bps
2s vs. 30s: 335bps
5s vs. 10s: 109bps
The Treasury will auction $11bn 30 yr bonds at 1pm...here is a look at previous auction results.
3m/10yr bp vols: 180