MBS Live Recap: Yes, MBS Really Lost That Much Versus Treasuries

By: Matthew Graham •

MBS lost 10 ticks today while 10yr Notes gained 1 tick.  Times like this are uncommon, but they do happen.  The perfect storm required for such things typically includes a massive bond rally (check) driven by unscheduled events like trade tweets (check), especially around the beginning of the month (check).

The beginning of the month is an important qualifier because that's when the monthly prepayment speed report is issued.  When speeds are in a state of flux due to a big market movement, investors are more cautious anyway (read: not paying as much as they otherwise might for MBS).  If speeds are faster than expected, there can be outright panic reflected in MBS prices.

But why do speeds hurt?  Here are the bullet-point concepts intended to help make this esoteric concept more tangible:

  • An investor who buys mortgages typically pays a bit more than the principal balance with the promise that they'll be able to make money collecting interest over time.

  • So borrowers have to keep their loans for a certain amount of time in order for the price of the mortgage to make sense to the investor

  • If borrowers refi earlier than the investor expected (due to a sudden drop in rates) the investor is not going to pay as much for the next loan they buy.

  • Translation: downward pressure on MBS--an asset whose price was suddenly revealed not to be matching its expected return

If you want to talk more about this (or read more about it), don't worry!  It's sure to get plenty of our attention tomorrow too!  There's just not much else going on from a calendar standpoint apart from the 10yr Treasury auction at 1pm.  Even that is a hit and miss market mover.