MBS MORNING: Frustrating Reminder of Reality
We've spent a fair amount of time discussing the factors moving money in markets recently. Most of which have been centered around technical trading strategies and risk aversion allocations (speculative).
After bouncing off of key support levels (technical and psychological), the S&P rallied 100 points in just eleven trading sessions. Stocks became a freight train....slowly picking up passengers as resistance levels were broken. However, more recently momentum has faded and the index has gone sideways as sellers who attempt to to take profits are met with demand from "late to the party" passengers who are too stubborn to admit that they likely joined the profit party TOO LATE. Those market participants, now stuck chasing profits, have kept stocks range bound.
That sentiment in stocks has resulted in some interesting activity in the bond market. The main theme as been VOLATILITY. Some days benchmark TSYs rally for seemingly no reason, other days we see capitulation-esque sell offs that result in multiple reprices for the worse. This has been a result of mixed messages from stocks. There is a clear loss of momentum on the equity side...yet no confirmation that enough sellers are willing to follow through. On the days when risk aversion is in style...TSYs and MBS rally. After those rally days there is a slow and steady build up of profit taking followed by new steepener (selling 10s buying 2s) positioning. Then the cycle starts over again. You may have noticed this if you have been pacing rate sheet behavior ....wild pricing swings and noticeable variations of mortgage rates have defined the past few weeks. In the end...the market has eventually returned to status quo. RANGE BOUND!!!!
I am really going to BANG BANG BANG this into your heads this morning.
Notice the 10 yr has consistently meandered back towards the 3.65 yield level...
This is for good reason. 3.65 corresponds with the 116-14 range on the 10 yr TSY SEPT FUTURES contract price. That's the 23% retracement from July price highs. So while stocks are trying to break support levels and move lower (970 on S&P)...the 10 yr is trying to break overhead resistance....BUT just keeps failing. BANG BANG BANG
This occurred this morning. Once the 10 yr contract reached 116-14. Trader's were unwilling to accept that valuation, attempts to break resistance once again FAILED and we saw a BOUNCE lower. BANG BANG BANG
For your current coupon title belt holder, overhead resistance has been right at 100-00. PARNERTIA. Look how much time the FN 45 has spent over par. Not much.
Here is a look at more recent price action. This morning the FN 45....BANG BANG BANG off 100-00.
My point.
Volatility is an angry animal...especially when the market is poking and prodding at a wide range of resistance and support levels. Dont get caught up in short term momentum. Be extra aware of when your lenders are paying....they will offer up some juicy bps, but it wont likely last long. Manage your pipeline the same way traders are managing their positions. Dont get greedy while the markets are stuck in "WAIT AND SEE" mode. We've seen mortgage rates drop as low as 4.875 (with points/if you are perfect borrower)....but thats as low as we've seen lenders willing to go. When your YSP (base pricing + servicing!!!) reaches the high side of recent ranges...dont wait for more. TAKE YOUR PROFITS WHILE YOU CAN....because the markets are in "WAITING FOR GUIDANCE" mode...and they could go in either direction.
Tighten your ranges and dont forget about PARNERTIA.
2s vs. 5s: 145bps
2s vs 10s: 251bps
5s vs. 10s: 106bps
PS The TSY department will auction $39 billion 5 yr notes at 1pm. Here is a history of recent 5 yr note auctions.