In the past two weeks, the Fed bought over $30 billion net! That's a pretty substantial injection on the demand side of our MBS equation. But this week, the "love" only totalled $21.8 bln. I'm no mathematician, but that's something like 68% of the previous two weeks. Of the love that we actually did get, seems like Fannie was the more attractive sibling this week, garnering what borders on a ridiculous majority of the bid. In terms of gross purchases, Fannie saw over $25 bln compared to the 1.75 and 3.2 billion dollar pittances slung the ways of Freddie and Ginnie respectively. Big Big difference. 4.5's got the most love overall, with the front month being best. June settlement 4.0's however took the prize for the highest single coupon purchase. Now where were all those whiners who said the Fed wasn't buying in the lower end of the stack?
What gives man?! Matzoh or chocolate induced loaginess delayed the checkbook opening? Who knows... Whatever the case, it seems a unanimous conclusion that the holidays took a toll on the personnel levels on Wall St. et. al. Volume was low and many participants were slightly more absent than usual. This was mostly warranted at the beginning of the week. Indeed we referrenced somewhat of a drop-off in origination volume. It would only stand to reason that if supply was down, demand could decrease as well in search of relative equilibrium. That was all well and good until yesterday, and to a greater extent, today, when supply really ramped up and demand did not rise fast enough to meet it. Originators were in big with a supply dump yesterday to the tune of 6 billion plus. Today, 5.5's saw active selling from money managers and hedge funds. 4.5's fought the good fight though, performing 2 ticks better than either adjacent coupon, helped no doubt by Uncle Ben, but also suprisingly (or is it?) seeing bid demand pick up among money managers, and overseas accounts. It's uncommon for Asia to show much interested in anything other than Ginnies, so a bit of Agency MBS demand is a welcome change.
The net effect on prices of the 30 year stacks were not good--not catastrophic--but not good. You likely saw some reprices for the worse on these numbers (notice 4.5's better than adjacent, and 5.5's the only fannie with a double digit loss):
Since 5pm "Going Out" Marks....
FN30_______________________________
FN 4.0 -------->>>> -0-08 to 100-00 from 100-08
FN 4.5 -------->>>> -0-06 to 102-27 from 102-01
FN 5.0 -------->>>> -0-08 to 103-00 from 103-08
FN 5.5 -------->>>> -0-10 to 103-25 from 104-03
FN 6.0 -------->>>> -0-04 to 104-24 from 104-28
GN30________________________________
GN 4.0 -------->>>> -0-07 to 100-08 from 100-15
GN 4.5 -------->>>> -0-06 to 102-05 from 102-11
GN 5.0 -------->>>> -0-10 to 103-18 from 103-28
GN 5.5 -------->>>> -0-08 to 104-04 from 104-12
GN 6.0 -------->>>> -0-08 to 104-18 from 104-26
Represented graphically:
You can see we ended, basically, at the lows of the day. One potential silver lining is that the 4.0 touched PAR several times, but stayed above the entire day. Additionally, the lower coupons fared significantly better on spreads as dually mentioned by AQ and I earlier today. The 5yr treasury was down 11 ticks bringing the yield to 1.773 while the 10 year was down 20 ticks bringing the yield to 2.834. Several analysts noted that a 2.5-3.0 trading range for the 10 yr note seems to persist. That's fine by us in MBS sector as spreads continue to tick tighter here and there (as expertly discussed by Bill Berliner yesterday). Earnings news eventually gave a lift to stocks with the dow ending up 95.8 at 81.25.
Yes, today was a loser for MBS, but what about the bigger picture? I love AQ's long term tick chart posted earlier today in which he suggested the possible trend shift. I want to zoom out a bit more and show you what today looked like against the backdrop of closing prices over the last 4 months.
Remember this chart? The grey line is that key level we discussed that served as a solid floor earlier, a ceiling for a few months, and now a floor again. When it last touched, we suggested it should hold a bit longer, and it has. You can see the red lines... They enclose today's price movement. Whoa! Not really that bad eh? We're still quite a ways from tripping our "uh oh trigger." It could be a freefall to there or we could have some bi-directional chatter for a few more days or even weeks. Whatever the case, today is really the first day of this week's uptrend where we've been able to see the trend reversing, and thus the first meaningful time this week to consider a lock for short to mid-term deals. Statistically, just as AQ pointed out earlier this week, we're definitely nearer the recent highs than we are the recent lows, so even if pricing improves, you will have netted a good decision. This IS NOT an outright lock recommendation, but rather a reminder that IF you feel like locking, we won't make fun of you.
In the slightly longer term the magic 8-Ball says "outlook uncertain: please try again." last time we "hung out" above that price level around 99-22 (ish) on 4.0's, we stayed above just a bit longer. But we weren't in the midst of important earnings announcements and a pretty leggy stock rally. A lot can be dependent on headlines and event risk over the next few sessions. Tomorrow is an options expiration day and combining that with what has already been a low participation week, we'd expect at least the normal amount of volatility and possibly more. We'll also get Citi Q1 earnings which have potential to shakes things up in either direction. If you're past lock cut off today, I suppose we'll have to reassess in the morning, but if you still have that door open, and assuming your lender didn't brutalize you with an overzealous reprice today, more sensitive deals probably would benefit from a lock in the face of this voltility and a probably short term retest of the 99-22 price level in 4.0's. On the bright side, I'm encouraged to see JUNE and not MAY 4.0 MBS get the higher bid. Some might consider that a sign that the Fed sees rates staying in this mid 4% range for more than just a month. Heck, it could mean a lot of things, but one thing I'm sure of: it's better than over 90% of the Fed's purchasing going to 5%+ coupons.
On the calendar for tomorrow is Consumer sentiment and Bernanke Speaking at the fed's Community Affairs Research Conference. We'll see you bright and early.
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