MBS OPEN: Still More Questions Than Answers
Last week, the trend of us poking and prodding at potential problems rather than posing new answers continued. In the meantime markets meandered as risk aversion dominated meager summer trading flows, by week's end the S&P was near its weakest levels while the yield curve was at its strongest. The street is indeed still seeking guidance, still searching for confirmation.
S&P weakness: the neckline (support) of the "head and shoulder" pattern was broken and is now acting as overhead resistance. Notice the "stall" near price...that illustrates the bearish bias over stocks and the marketplace "waiting for confirmation and searching for guidance"...
Mortgages made progress as a "flight to quality" flattened the yield curve and traders adjusted hedge ratios, pushing prices of "rate sheet influential" MBS coupons into the mid-May range. By week's end many lenders had moved mortgage rates into the low 5.00%-high 4.00% handle (these rates assume no loan level price adjustments and at least one origination point.)
The sentiment shift towards risk averse assets had noticeable flattening affects on the yield curve. Here is the yield curve last Monday vs. the yield curve Friday.
The flattening yield curve helped the FN 4.5 rally 17 ticks from 100-02 to 100-07 while the FN 5.0 was 13 ticks higher to 102-13 at 5 pm "Going Out" marks on Friday.
Here is the week over week of the FN 4.5:
Here is the FN 5.0 weekly:
It was a rocky road to recovery for the FN 4.5, however its return to current coupon status boosted originator optimism as fencesitters found no reason to float any further.
Here are a few charts to take note of...
As we have been discussing recently, weaker commodity prices illustrate market participant's economic concerns. Notice the stall and failure of NYMEX Crude to move to far away from $60....further illustration of "waiting for confirmation, seeking guidance"...
3 month LIBOR continued to break its own record of breaking its own record low!
In Other News last week:
ABA Says Delinquencies on Rise. MNS Says Bad Implications for Housing
FBI Says Mortgage Fraud Increased in 2008. MND Looks Ahead at 2009
Mortgage Applications Rebound in Week Ending July 3, 2009
G8 Recap: Rich Nations to Increase Aid to Emerging Economies
IMF Predicts Slow Recovery Ahead
FHFA Releases 5-Year Strategic Plan
Dont lose sight of the progress we've made over the past two weeks, the fall has been fast (not as fast as the rise right?) and corrections are inevitable (small or big, short term or long) as the marketplace is at opposite extremes...stocks oversold? bonds overbought?
For mortgages, a flatter yield curve means more room for MBS to rally, however higher MBS prices mean more profits to be taken...this implies some choppy price action may lie ahead as the road to recovery remains unclear. All is dependent on econ data and earnings reports in the week ahead. HOW WILL BANKS MAKE MONEY IN THE FUTURE???? THE WEEK AHEAD
Manage your pipeline like a portfolio, set a goal, once you reach it, consolidate your earnings!
2s vs. 5s: 132bps
2s vs. 10s: 241bps
5s vs. 10s: 109bps
Stock futures are higher. Oil is back below $60 (again). The yield curve is essentially unchanged, and MBS coupon prices are FLAT. Waiting for guidance, seeking confirmation!