MBS Live Recap: Muted Bond Volatility Means More Love For MBS

The past several days have been very good to the mortgage market.  The secondary side of the market had been waiting for spreads to be able to tighten versus benchmarks.  That's definitely happening.  The primary side of the market had been waiting for lender pricing to tighten versus MBS.  That's also definitely happening.  Notably, the latter is a bit of a moving target depending on the lender, but more than any other recent day, almost every lender moved into better territory by a bigger-than-normal amount and hit the best levels they've offered since 2016.

All of the above is what we expected to see, eventually, as mortgages endured a painful bout of underperformance in the first 2/3rds of August.  Things began to level-off by the last part of the month, but it's really only been the past 5 business days that we've seen a major shift.  There is definitely more room left to run if Treasuries continue to hold as steady as they have been, but we'd expect the tightening/outperformance to start settling down fairly quickly--more so due to lender constraints than MBS prices.

There weren't any major reactions to domestic events today, and it was mostly overseas markets that reacted to overseas events overnight.  Treasuries were somewhat influenced by the tabling of Hong Kong's extradition bill (deescalates tensions related to recent protests) as well as stronger Retail Sales in Europe.  But the most interesting part of their reaction was the fact that yields seemed determined not to move any higher than 1.50%.  This ultimately paved the way for correction during domestic hours.  Treasuries didn't end up gaining any ground as a part of that move, but they didn't lose much either (incidentally, perfect conditions for MBS tightening!).