(This Paragraph Appended at 12:05 PM: Prices have fallen 8 ticks in less than 10 minutes. Potential Reprices for the worse, but this has not taken us out of the range-bound channels we've been discussing recently as we are exactly at 100-12. This is 3 ticks down on the day and any trading sentiment beyond the normal volatility within a range is likely reserved for auctionr results due out at 1pm. But if you have short term deals, or are otherwise sensitive to a reprice for the worse and can't afford to take the risk into the auction, reprices may be coming)
(original content below...)
The MBS NINJA wrote you some commentary on the Fed' exit from the mortgage market...
(btw if you are new to the site...the MBS ninja is an MBS trader and long time contributor to the blog)
In 2009 mortgages have enjoyed a massive rally and stabilization of trading flows (for the most part) as government interventions in the wake of the Lehman collapse and GSE withdrawal (effectively) have rebalanced MBS spreads. Where the post-panic fallout in November of 2008 left current coupon yield spreads in disarray at well over 200 basis points above 10yr note yields (then 3.10%), the recent Fed intervention has firmed things up three-fold as the correlations have been "calmed" to below the century mark (<+100/10yr notes).
This mortgage-rates supportive equation is scheduled to tally $1.25 Trillion in purchases by year end 2009, with the running total at 69% of that goal YTD ($861.9 Billion). To put that in perspective,the total amount of secondary agency MBS issuance YTD is $1.3 Trillion (well ahead of last years $1.06 Trillion for the entire year...only 2003 stands out as a higher benchmark supply year where rates dropped and much of the MBS world was refinanced into newer and lower mortgage rates.)
This demand side support has been provided at a rate of $5 billion mortgage-backs purchased per day by the Federal Reserve (via its present construct of two buying agents-Blackrock and Wellington, as opposed to the initial line up of four) vs. the approximate $2 billion per trading session in new production sales by mortgage banker. Adding support to the mortgage rates equation was the Fed Reserve "back-stop" bid to treasury bill/note/bond supply, that interventive measure ends sometime in October.
Looking ahead to 2010, MBS issuance from the three major agency backed-MBS (FNMA, FHLMC, and GNMA) will likely decrease as GSE portfolio mandates set in and the secondary market current coupon ticks higher....and mortgage rates back up (rise).
The 2009 average spread on 30yr "current coupon" mortgages are as follows;
* +88/10yr swaps,
* +109/10yr notes,
* +212/5yr notes
Subtracting the Federal Reserve bid will initially back spreads out another 10 to 15 basis points and still leave things manageable as something will likely be created or re-established to fortify the overseas appetite for AAA yields on a large and liquid market ($7-9 trillion) that still offers the best and safest return on principle worldwide.
The anticipated widening in yield spreads will likely result in higher mortgage rates. In regards to absolute yield levels, much is dependent on the shape of the yield curve at the time of the Fed's exit from the MBS market. If 10yr swap and Treasury yields hold constant near current levels, we forecast base 30 yr mortgage rates will rise into the mid-5's (best case consumers/no LLPAs).
The wildcard again are the GSEs (FNMA and FHLMC) and their vested bid in the U.S. Housing market---something largely missing the last two years as accounting irregularities and other administrative transgressions have resulted in a loss of investor confidence and less participation in the mortgage market.
Their buying has amounted to $165 billion YTD, and some sort of support to their balance sheets is expected (either directly or in a quasi-GSE) as the government will not entirely abandon such a vital cog in the national GDP engine. Housing brought the country to great economic heights, and brought it crashing down as well and that warrants much support and intervention at times.
Plain and Simple: Mortgage rates will rise when the Fed exits the mortgage market. Who will be the liquidity provider when they do exit? The issue of GSE reform needs to be paid some serious attention!
Here is two day FN 4.5 chart....
Yes...that chart illustrates a move higher in price. Given the fact that MBS trading has been slower than Jason Wilborn's cross over (sorry for inside joke but I need to take a shot at him now and again), you can thank the RANGE BOUND price action of benchmarks for the modest amount of green on the scoreboard.
Here is summer range...the 10 yr has failed to break 3.50 with any strength since mid-August. We've been stuck between 3.35 and 3.50 for quite some time now (with a few outliers here and there). This morning..the 10yr reversed course at 3.50 again....the short term range between 3.40 and 3.50 holds!
The dollar is weaker, oil is more expensive, gold has traded up to $1,019 after falling below $1,000 yesterday, and stocks are slowly trading higher towards new 2009 highs....
Mortgage rates are slightly higher as rate sheet rebate has been trimmed by most lenders. THE STOCK LEVER will likely effect the rates market today. What's good for stocks = bad for bonds. Stay alert for chopatility.
The TSY will auction $43 billion 2 yr notes at 1pm.(Waiting and wondering when/if the yield curve will flatten)
PS...Bill Berliner published his weekly MBS Commentary HERE. Its a must read!
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