While the S&P continues to show a lack of upside potential, the 10 yr TSY note has reversed course and is now up 3/32 in price yielding 3.49% after reaching an intraday high yield of 3.55%. As the yield curve has flattened, "rate sheet influential" MBS coupons have recovered early session losses and are now trading higher in price. Here it is in pictures...
S&P unable to make a move to the upside...
10 yr bouncing off of 3.55% intraday high. 3.55% is our support level.
....and the FN 5.0 ticks up.
We are definitely seeing better rate sheets this morning. However we dont want you to get too excited about a rally as the two most "rate sheet influential" MBS coupons, the FN 4.5 and FN 5.0 (sub FG/GN for FN), are stuck near 100-00 and 102-00 respectively. This reflects the slow marketplace and general lack of demand for those two negatively convex coupons. This is a function of the fact that if TSYs sell off, prices of those two MBS coupons will fall much faster than they rose. Looking forward: unless TSY yields fall and interest rate volatility calms (I should say continues to fall)...these two coupons will not likely see much more upside price movement. This implies your rate sheets are RANGE BOUND.
That said...with the stock market teetering on a sell off and bond traders buying on weakness.... there is huge potential for upside rate sheet returns. Plus lenders are likely trying to avoid locking too many loans as fall out risk (costly for mortgage banker) from a drop in TSY yields is a growing concern. So...if TSYs move lower in yield and MBS rally, lenders may open the floodgates to lock up some production (which has been very slow) while they can. Actually...some may be doing this already...take note of the aggressive lenders who are trying to buy up loans right now.
Originators: go back through your rate sheets over the past 10 days and note the max YSP (I say SRP+ base price) lenders were paying. If you are near the top side of the range....GUTFLOP your pipeline!!!
Floating is really tempting, just dont forget the looming TSY auctions and the fact that trading in MBS world remains very slow...GUTFLOP because YSP is likely near its recent highs....
Next event: Treasury will auction $35bn 3 yr notes at 1pm. Stay Alert
2s vs. 10s: 254bps
MBS Market Alerts
