MBS Pricing Snapshot

Quite the narrow-range roller-coaster today... Even now, this is nothing more than a heads-up. The same prices earlier today failed to prompt more than a few negative reprices. Although we can't rule it out right now, but wouldn't consider it likely.

MBS aren't quite at their lowest levels of the day, but they're getting close... Again.

The first instance of such weakness was on the approach to the 10yr Auction. Fannie 3.5s were at the same 101-08 they are now. The FOMC Minutes release saw a brief dip to 101-05 and then a recovery that rallied all the way to the highs of the day at 101-15.

Reprice activity has been limited, however, and as long as long as we continue leveling-off here, it should stay that way. 10's bounced at 2.64 and had just approached 2.66 before doing some leveling-off of their own.

Reprice risk is back to neutral.

While there could still be a lender or two yet to come with a negative reprice, MBS trading levels are back in positive territory. This was the sort of knee-jerk that we alluded to in the previous alert and is not uncommon following FOMC Minutes and other important pieces of data.

Fannie 3.5s are 3 ticks higher on the day now at 101-13. 10yr yields aren't yet back into positive territory, but have decidedly reversed since the initial reaction. They were as high as 2.673 and are now down to 2.649. For what it's worth, that is an incredibly tiny range of yields for a post-FOMC knee-jerk. It speaks to the desire to maintain the sideways grind until we get more data. The reasons for needing the data are especially evident after reading through the FOMC Minutes.

At this point what had been negative reprice risk is becoming positive reprice potential for a few lenders while we hold or improve upon these levels.

As expected, the Minutes from the most recent FOMC Meeting contained no major surprises. Here are some highlights that confirm or expand on what we thought we already knew about how the Fed is thinking, and at least one pleasant surprise:

"purchases of longer-term assets did not appear to have had an adverse effect on the functioning of the markets for Treasury securities or agency mortgage-backed securities (MBS)"

"Improvements in housing-sector activity appeared to slow, possibly reflecting the rise in mortgage rates since the spring. "

"While the housing sector continued to strengthen, supported by improving fundamentals and gains in house prices, the increases in mortgage rates since the spring were seen as a potential risk. The extent to which the higher mortgage rates had materially affected that sector remained unclear, with the exception of the sharp decline in refinancing activity. But it was noted that recent softness in housing starts and home sales might well reflect some restraint from those higher rates. " (this is the pleasant surprise. It's nothing major, but a clearly delineated assessment of risks associated with rising rates).

"They expressed concerns that tighter financial conditions might weigh on the recovery in the housing sector. A few others observed that the increase in longer-term yields in recent months had not seemed to leave a meaningful imprint on other asset prices, suggesting that the effects on the economy were likely to be relatively muted." (this is an important division within the Fed. This is why we so badly need to see MORE ECONOMIC DATA).

" In addition to updating its description of the state of the economy, the Committee decided to underline its concern about the tightening of financial conditions observed in recent months. It also acknowledged the improvement in economic activity and labor market conditions since its asset purchase program began, while emphasizing that it was prepared to be patient and await more evidence that progress would be sustained before adjusting downward the pace of purchases. " (just another instance of the Fed being "aware" of the rising rate problem.

"In judging when to moderate the pace of asset purchases at its coming meetings, it would assess whether incoming information continued to support its expectation of ongoing improvement in labor market conditions." (in other words, "it depends on the data!" The conclusion is the same: more data please!).

There are no salient surprises in the Minutes. Bond markets weakened somewhat, but it's only amounted to 2 ticks of weakness for MBS so far. 10yr yields are at their highest levels since Sep 24, up to 2.672.

Fannie 3.5s are down 5 ticks at 101-05. Negative reprice risk remains in effect and is more developed at these levels.

A bounce back isn't out of the question considering the lack of new ideas. Markets have been very pent-up and some knee-jerk is to be expected. Give it time to shake out depending on the lender.

10yr yields--perhaps with a wary eye on the auction coming up at 1pm--just broke into new high yields for the day and MBS are right on the edge of breaking into new lows. With the earlier highs in MBS coinciding with some lenders' rate sheet print times, negative reprice risk is increasing, though not yet full-blown. Between the 10yr Auction and FOMC Minutes and hour later, there is plenty of potential market movement ahead.

Fannie 3.5s are down only 1 tick, and this is only 5 ticks off the highs (101-10 vs 101-15 earlier). 10's are only up 2 bps at 2.658. Reprices would be few and far between at these levels, but risks would increase if MBS broke into news lows by more than a few ticks for more than a few minutes.