MBS MORNING: Stock Lever Makes for Choppy Morning
Good Morning.
MBS market volume is running at above average levels so far this morning. Originators are modest sellers...nothing to write home about though. Other than that, fast money hedge funds continue to exit positions in "rate sheet influential" MBS as rich price valuations keep OAS levels negative (EXPENSIVE). This current coupon selling has pushed MBS/TSY yield spreads (static) a bit wider....MBS are being outperformed by benchmark big brothers!
Since most L.Os and borrowers could give a damn about the above...lets move onto the more important originator outlook metric....PRICE ACTION!!!
The FN 4.5 coupon has been desperately wanting to tick higher, however as our benchmark big brothers have remained skittish of the stock lever...there isnt much room for prices to run up (also see OAS comments..Relative value buyers dont like negative OAS.... although dollar prices are cheaper this AM). So far its been choppy. Here is a two day..
Although this morning stocks moved lower as profit takers set out to time a top before tomorrow's NFP print, fixed income market participants have been unwilling to "take the bait". TSY traders continued to sell early in the session, pushing the 10 yr note all the way up to 3.80%. However, as the S&P ticked below 1,000 and the 10 yr hit an intraday price low, short coverers helped the 10 yr TSY note limp back towards 3.75%. Volume is running at 500,000 contracts traded in the 10 yr futures electronic market. We continue to watch the stock lever for further guidance...range trading the yield curve (spread) with futures contracts in the mean time.
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PAUSE FOR EDUCATIONAL OPPORTUNITY
Remember mortgage bankers fund their lending operations by selling forward their pipeline of committed (and uncommitted) loans....
The MBS coupons that determine your rate sheet pricing are traded in the TBA MBS market...TBA = To be Announced. In the TBA market, at the time of a trade, buyers and seller agree to only a few specific terms, like what coupon, the issuing agency (Fannie or Freddie), and a buy/sell price....the actual pools of loans that will be bought and sold are not disclosed at the time of this agreement. Instead, two days before the pre-scheduled settlement date (determined by SIFMA), the MBS seller "notifies" the MBS buyer of the specific pools that they will deliver to satisfy the previously agreed upon trade. The MBS buyer then reviews the pool information to ensure that the seller is delivering pools of loans that meet the agreed upon terms (which were determined at the time of the trade). Then two days later, on settlement date, funds are wired and the trade is complete (it goes deeper...this is just an outline of the process).
The TBA trading mechanism plays a very important role in the generation of mortgage rates. The TBA market allows originators to make "forward commitments" before the loans in their pipeline are actually closed...just like loan officers lock in interest rates before the loan goes to closing. For both the mortgage bank and the loan officer, this function serves as a hedge. It allows them to protect their pipelines from interest rate risk (rates getting higher and their loans not being worth as much). If mortgage bankers were forced to lock in their rates after closing...they would likely add in a large "interest rate risk" premium to rate sheets in an effort to protect themselves from shifts in the yield curve.
Plain and Simple: Without the TBA market mechanism...mortgage rates would be much higher!!!
END EDUCATIONAL MOMENT
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2s vs. 5s: 150bps
2s vs. 10s: 254bps
5s vs. 10s: 104bps
Note from Trading Floor: eMBS posts prepay reports later today. Ninja is buying FN 6.5/6 and 6.5/5.5 coupon swaps