We began the trading session today in MBS with liquidity conditions possibly WORSE than they were on May 27th, 2009--aka "Black Wednesday." Unquestionably the past 4 sessions of selling in broader bond markets has been far, FAR worse than Black Wednesday, even if no individual day has matched the 2-point sell-off. The Week Ahead post was all about this sort of liquidity problem and bears a read if you haven't had a chance yet. In fact, it turns out to have been all too relevant right out of the gate.
The gaps between buyers and sellers this morning blew out to levels that made it literally impossible to know what the actual price of a mortgage-backed-security was at any given time. Slowly, traders began to get closer to each other in a sort of agonizing version of "Marco Polo." Just like in quantum physics where you only have a "probability" of finding an electron in a certain area around the nucleus, Fannie 3.5 MBS are probably somewhere between 99-09 and 99-13 for the past hour. No one really knows, but we do know the range of probability earlier this morning was around 20 ticks!
The improved liquidity (improved, NOT healthy though) will help us hone in on actual price levels to a better extent as the morning progresses, as will the increasing stability of benchmarks. In that regard, 10yr yields are coming down off a series of "lower highs" starting just above 2.66 and most recently having a small supportive bounce under 2.63.
The bottom line to this "special alert," is to get an earlier-than-normal word out that prices have begun the day in a state of disarray. Rate sheets are destroyed, and the proverbial knife is still falling. We're essentially STILL waiting for the first evidence of a sideways consolidation in the trading range before we can hope for any sort of bounce back. This morning has a chance to develop into such a thing depending on how it shapes up into the afternoon.
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As such, 3.5s continue to be more actively traded and more liquid than 4.0s though that landscape is in the process of changing. We keep a close eye on that liquidity and will update to 4.0s as the default coupon that's selected upon opening or refreshing the dashboard, but would also advocate watching both. Keep in mind you can click on any security in the "live pricing" table" to bring that security into view on the chart.
Treasuries were already under significant pressure overnight after having fought off a break above 2.633. When domestic trading started to pick up at the CBOT open, Treasuries Futures volume skyrocketed from already high levels and prices fell further. Cash yields rose to 2.667 and MBS entered a state of panic at the open.
Keep in mind that, although the MBS market is relatively large in terms of dollar volume, there are fewer active participants on either sides of a trade even on good days. On bad days, it can be harder to hone in on the real price--hard for sellers to find willing buyers at their preferred price and vice versa. So for most of the morning, buyers and sellers have stared across wide canyons at each other, with woefully infrequent attempts by either side to make the leap.
These sorts of liquidity issues are present in Treasuries as well, but MBS take them to completely different levels. When the liquidity has broken down as much as it had earlier this morning, MBS markets come as close to "shutting down" as they did on Black Wednesday back in 2009.
1 hour into the session and some measure of consensus has emerged as to where real prices are for MBS--about a point lower in Fannie 3.5s at 99-16. There are no events are data driving the weakness. It's all about the same 'structural problems' referenced in Live Chat Featured Comments
MBS Market Alerts
