Mortgage rates improved today, profit takers did however trim in gains towards the end of the session.
5pm Marks...change since 5pm yesterday
FN30___________________________________
FN 4.5 -------->>>> +0-10 to 101-10 from 101-00
FN 5.0 -------->>>> +0-11 to 102-09 from 101-30
FN 5.5 -------->>>> +0-05 to 102-19 from 102-14
FN 6.0 -------->>>> +0-04 to 103-11 from 103-07
GN30___________________________________
GN 4.5 -------->>>> +0-10 to 101-16 from 101-06
GN 5.0 -------->>>> +0-08 to 102-14 from 102-06
GN 5.5 -------->>>> +0-03 to 102-23 from 102-20
GN 6.0 -------->>>> +0-04 to 103-08 from 103-04
After being delayed one day, the highly touted "Financial Stability Plan" that created optimistic buying in equity markets and a initiated a "supply burdened" sell off in bond markets...did nothing but deflate us today....(pun Intended). I would compare the letdown to that of one RALPHIE PARKER (A Christmas Story) when he used his long awaited Little Orphan Annie pin to decode the secret Ovaltine message......"Be Sure To Drink Your Ovaltine"...yeah...THAT level of a disappointment in markets today.
Here's how stock markets reacted to the 11AM announcement...
Did you notice the Stimulus Package passed the Senate? Equity markets didn't...
Bonds, on the other hand, benefited from a flight to safety bid (which probably forced bond floaters to cover their short positions which added fuel to the rally).
Remember what TSY yields have done over the past few weeks...expecting a Stimulus package, fixed income investors let the yield curve steepen considerably. The market baked in economically/financially friendly ACTIONS (not plans for action) from the Treasury today...the attention of investors went from safe bonds (protectionism) to risky stocks...yields went up (government borrowing costs) and stocks turned optimistic.
So today when the Treasury Department only provided PLANS FOR FUTURE ACTION...the market was out of position and had to scramble back to the safety and liquidity of the US TSY market.
Good timing for the Treasury too!!! Just so happens immediately after Geithner's speech the first leg of quarterly refundings was scheduled to take place. After all the talk on Stimulus Packages and a "Government Plan to Fix this Mess"...the refunding process was expected to be expensive for the US Government (higher bond yields =higher cost of borrowing).
Well "HA HA" says the US Government. Guess what... auction demand was higher than expected and the Treasury turned out to get a decent rate (still low historically) on a 3 yr loan of $32,000,000,000. Interesting...this goes in line with MBS Op-Ed: Making Sense of this Mess
Plain and Simple: the Government is Manipulating Borrowing Costs Again!!!!
Don't forget who is running the show right now...the Federal Reserve.
After the dust settled I posted a poll on the blog... Poll: Was Financial Stability Plan: Phase 1 Enough???
61 of 80 votes said....NOT ENOUGH DETAILS were provided.
I pose a question to you...
How can they provide more details on a macroeconomic rescue package that is expected to fix the world if they have no idea what its going to cost us????
Some say the Treasury has had enough time to figure this out...I say it has been impossible to make any progress!!!
The Fed and the Treasury have no idea what banks are REALLY worth right now because no one knows what bank assets are REALLY worth...more specifically bank "toxic mortgage assets". There is no market for those securities. Until a market is made for these "bad mortgage assets" we will be stuck in this crisis, the Fed will be forced to continue expanding their balance sheet. The CORE PROBLEM stems from these bad assets. Until the Treasury Department figures out what they are worth we will patiently wait for headline news.
In the mean time you should be happy that TSYs are back in the the good graces of market participants. The steepeneing yield curve has not been a friend to MBS lately..a flattening curve is welcoming feeling...
If demand at tomorrow's 10yr auction is respectable, MBS should benefit from further yield curve flattening (TSY gains). Today the spread between MBS and TSYs got wider...when the spread gets wider it creates a buying opportunity for MBS investors. Spreads gapped out most towards the short end of the stack too (4.0, 4.5, and 5.0)....this implies there is some room for a down in coupon MBS rally.
Remember we compare MBS coupons to TSY securities of similar maturity. If we want to move "down in coupon" (5.5 to 5.0...4.0s are no good right now) we need longer term TSY debt yields to move lower. These longer maturity Treasury notes compare to the thinner (lower) coupons which have a longer duration because the mortgage borrower is locked into very low rate and therefore their incentive to refinance (prepay/pay off MBS) is low...so MBS investors can expect cash flows for longer period of time.
I know this rally is tempting but follow GUT FLOP. Originators did sell a portion of their loan supply this morning which puts a speed bump behind us, but if you are locking your loans there will be more supply to come. If you did lock today...not a bad move....lately MBS investors have not taken well to higher MBS prices. Profit takers will also continue to loom as spreads tighten (MBS up more than TSYs or TSYs down more than MBS or MBS up and TSYs down)....so this is added risk to consider when deciding whether to lock or float. There is also that annoying possibility that lenders will hold gains for themselves. Follow GUT FLOP...treat your pipeline like a portfolio.
Class A Notification was today. Settlement is Thursday.
Tomorrow
700AM: MBA Application Activity. Mortgage application activity is expected lower as mortgage rates moved to 5.25% from 5.10% last week
830AM: December International Trade
10AM: House Financial Services Committee holds a hearing called "TARP Accountability: Use of Federal Assistance by the First TARP Recipients". We get to hear from "high ups" at Citigroup, Bank of America, J.P. Morgan, State Street, Bank of New York Mellon, Wells Fargo, Morgan Stanley and Goldman Sachs. Should be some sweaty bank leaders at that hearing...
1PM: $21 billion 10-year TSY note auction
2PM: January Treasury Budget...this includes GSE MBS purchases made in January
MBS Market Alerts
