MBS Live Day Ahead: Why Are MBS Prices So Much Lower This AM?

2.5 UMBS coupons last traded at 103.5 (103-16) yesterday.  This morning, they are down to 103.31 (103-11), which is roughly a 20bp drop.  But the charts on MBS only show them being down 1-2 ticks (.02-.05) depending on when you look. 

What's up with that?  In a word: "the roll."  More specifically, the monthly coupon settlement for 30yr fixed UMBS.  Up until today, coupons for the month of May were the "front month"--the most current, most immediate, first in line to expire...  The front month coupon is where we look to get "MBS prices," but there are multiple delivery months.  When May coupons are retired, June coupons take their place.

The only catch is that June coupons are trading lower in price than May coupons.  If we think about it, this makes a lot of sense.  Imagine you're an investor deciding whether to buy May or June MBS coupons.  You can opt to pay a higher price for May coupons in exchange for receiving your first payment a month sooner.  In other words, the difference in price between the two is largely a factor of "time value of money."  

So does this matter for pricing?  No.  Lenders are/were already aware of the difference in prices between May/June coupons.  The gap between the two doesn't change all that much and can almost always be assumed to be at least this big.  Even then, the people responsible for setting rates were actually watching and pricing based on June coupons anyway.  But more importantly, due to the time value of money, I'd encourage you to simply understand that a June coupon at 103.30 is roughly the same thing as a May coupon at 103.50.  If lenders have weaker rate sheets today, it would be due to the prevailing downtrend in MBS and the fact that they're still a bit weaker day-over-day, even after accounting for the roll.