Not only are MBS FIGHTING back against a much-worse-off treasury market, but they are certainly winning. A byproduct and opponent in and of itself is the chopatility we've seen so far today. At this moment, MBS are trending toward their lower levels of the day and a moderate amount of reprice risk can be assumed. But if you didn't see a reprice after the 12:30 lows, we're only just in line with the early morning lows now, so for those lenders, reprices might not be justified unless we see increased losses.
For a bit more color this afternoon, we'll turn it over to the MBS Ninja, but not before Isaac Newton has a chance to introduce him/refresh memories..
Newton said "if I've been able to see further then others it's because I've stood on the shoulders of giants" And as you might guess, AQ and I are not without our mentors. The MBS ninja is one of the most prominent among them... Even if we are never able to officially "unmask" the ninja, just know that when he speaks, we are all benefiting from over 20 years of experience actually TRADING MBS and from someone who, to this day, is a highly visible and active part of the TBA-MBS community with potent connections and a well of knowledge we couldn't begin to tap. Take it away Ninja...
In general, mortgages are gaining in strength as the rest of the fixed income market seems to be tailing off (i.e. steepening curve, higher yields) into the later parts of the afternoon. The same old story has unfolded again today: sellers are few and far between as MBS approach the most traditionally "supportive" time of the month-the end of the first week. That's where prepayments (official monthly report on prepayment speeds--gives market a sense of DURATION for MBS) and Non-farm payrolls data collide.
The first occurrence is a boost to the mortgage bid because the return of principle (remember, MBS security cash flows have an element of principle and interest to the bondholder each month just like a mortgage payment to the bank) is usually reinvested into the same market from which it came-MBS. This month the estimates call for $90 billion to re-enter the eight to $10 Trillion market, stabilizing prices to say the least.
Second, and lastly for this conversation, the revelations on Non-farm payrolls data on Friday, whether strong or weak, lets the market in on one more unknown variable. This reduces the pent up tension in implied volatility markets-and that is a good thing for predicting, modeling, and plotting cash flows on the longer end of the MBS spectrum-30yrs. 30yr MBS also happen to be both the deepest and most liquid market of mortgage-backeds and it should come as no surprise to you(if MG and AQ are doing their job) that they're the benchmark for calculating what you'll be seeing on your rate sheets come Friday morning
So, while treasuries and stocks whip around the next two days, take heart in the fact that our beloved and vital MBS market has some things it can look forward to, but as you always must remember when the Ninja has the mic, I'm almost always going to be thinking about MBS strength and weakness in terms of spread. It should be a a foregone conclusion that the benchmarks of the broader rates market (treasuries) will do what they'll do, and so we "look forward" to a few things for MBS in the context of the rates market. Ipso facto, if treasuries tank, MBS may lose ground as well, but in a general sense, the suggestion of "supportive week" is that MBS would "tank less." What more could you ask for?!
The Ninja's thoughts above are hopefully sounding similar to AQ's last mention of "supportive week" where he clarified "supportive" DOES NOT necessarily mean "higher MBS prices," but rather a better relative performance vs. benchmarks. It's at least one positive consideration going into NFP, but as always, the thing itself has more potential than perhaps any other econ data to move markets quickly and severely. As long as you frame that modicum of default positivity from supportive week in the "anything can happen to the yield curve" window, you know what you need to know to decide how many dice you want to roll tonight and tomorrow night.