MBS AFTERNOON: Volatility Exhausts Mortgage Investors
The Federal Reserve took a break from buying today. Servicers and Originators sold over $4bn "rate sheet influential" MBS today, $2bn of which was mopped up by the Fed, less than their recent average. Servicer selling signals a feeling of exhaustion in the MBS market place as servicers generally look to other instruments to hedge the value of their servicing assets (derivatives) before selling TBA MBS. This is a function of volatility in the marketplace, implying the TSY and mortgage market are preparing for ANYTHING in the AM...NON FARM PAYROLLS!!!
The previously discussed investor exhaustion is exhibited by MBS's performance against their benchmark big brother's today...rate sheet influential MBS yields are a few bps wider to TSYs yields heading into "going out" marks. In regards to price action, the FN 4.5 has remained range bound all afternoon....between 99-12 and 99-03...just boooouncing back and forth. All in all it looks like we head out for the day near the bottom side of the range.....
Tomorrow is the definition of an INFLECTION POINT in the marketplace.
Stocks have been sideways all week...in "wait and see" mode. In the mean time fixed income has set itself up for the possibility of continued volatility and higher rates as stock traders still have room to run to the upside. Although MBS are near month over month price lows...we must continue to wait on a selloff in stocks and a rally in the long end of the yield before we see a substantial "down in coupon" buying spree in MBS world(lower mortgage rates). That said...upside potential for MBS is large as stocks remain overbought and momentum has stalled...all is dependent upon tomorrow's Employment Situation Report. FLOATING REMAINS SUPER RISKY!!!
INFLECTION POINT
Stocks await confirmation, TSYs await correction and a return to longer term status quo levels. 3.50% on the 10 yr and PARNERTIA in MBS....
2s vs. 5s: 151bps
2s vs. 10s: 255bps
5s vs. 10s: 105bps