January settlement processes, profit taking, light originator supply, and an up in coupon Fed bias govern MBS markets today.
Fn 4.0-> +0-31+ to 101-23 Gn 4.0-> +0-02 at 101-02+
Fn 4.5-> -0-02 to 102-04+ Gn 4.5-> -0-02 to 102-29+
Fn 5.0-> -0-00+ to 103-01+ Gn 5.0-> -0-04 to 103-24
Fn 5.5-> +0-00+ to 103-14+ Gn 5.5-> -0-04 to 103-30
Fn 6.0-> +0-01+ to 103-25 Gn 6.0-> -0-03 to 103-30
Last week we referred to the MBS market as being a day trader's delight. The high liquidity and slower than expected prepay rates opened the door for a more aggressive short term trading strategy, which included an up in coupon bias (short term that is). We noted that certain coupons looked attractive and that we anticipated the Fed buying Freddie 5.0s. The Fed is is indeed bargain buying Freddie 5.0s today...
So we are gonna go ahead and toot our own "relative value up in coupon" horn for a moment...
Ah hem...TOOOOT TOOOOOOOOOOOOT
Ok thanks for allowing us to do that we feel better now.
Unfortunately as we have widely discussed in numerous posts the primary interest rate price function is disconnected from MBS trading so our crystal ball is presently clouded by a slight haze. We are happy to report that we are making progress in forecasting the Fed's buying habits though (ie Freddie 5.0s). Tracking and projecting Fed purchases will eliminate the need for a crystal ball altogether. Then all we need to anticipate is hedging and profit taking and booya...MBStradamus!!!
The Fed remains an MBS crutch so we remain confident that lower rates are on the horizon...the positive effects of the roll may not be immediate so dont expect s mindblowing rally tomorrow. Just know that the passing of settlement frees up funds and allows lenders to re-adjust pricing strategies based off of last months profitability.