Change from 5pm "Going Out" marks...
FN30_______________________________
FN 4.0 -------->>>> +0-03 to 100-09 from 100-06
FN 4.5 -------->>>> +0-04 to 102-01 from 101-29
FN 5.0 -------->>>> +0-04 to 103-10 from 103-06
FN 5.5 -------->>>> +0-02 to 104-02 from 104-00
FN 6.0 -------->>>> +0-01 to 104-26 from 104-25
GN30________________________________
GN 4.0 -------->>>> +0-04 to 100-13 from 100-09
GN 4.5 -------->>>> +0-04 to 102-07 from 102-03
GN 5.0 -------->>>> +0-03 to 103-26 from 103-23
GN 5.5 -------->>>> +0-07 to 104-16 from 104-09
GN 6.0 -------->>>> +0-00 to 104-24 from 104-24
Explaining Beginning of the Month Supportive Events....
Supportive Event #1: Prepay Reinvestments
Each month MBS analysts and traders spend a considerable amount of time forecasting borrower refinance behavior. Borrower refinance behavior (or any action associated with paying off your mortgage) is revealed through MBS portfolio prepayment speeds. Prepayment speeds are THE key determinant in the valuation function of MBS. If prepays increase or decrease more than expected it can drastically alter the value of an MBS holder's portfolio.
At the beginning of every month, the principal prepayments from the previous month are reported. The "paid off" loan principal (of the mortgages you own) is deposited in the portfolio holders account. This is straight cold cash...funds that can be reinvested!!! Depending on the interest rate environment those funds might be reinvested in new MBS....which adds funds to the demand side of the MBS market. This month portfolio "paydowns" totaled $106bn
That is $106bn that could be spent on new MBS. That is a SUPPORTIVE EVENT.
Supportive Event #2: Less Interest Rate Volatility
At this point in your education process I hope it has become clear to you how important the process of forecasting expected cash flows is in determining the value of any fixed income security. When pricing the value of a fixed income instrument the most important issue is predicting the future path of interest rates...or the expected volatility of interest rates over the time period in which you expect to hold a specific fixed income investment.
Future interest rates are not impossible to predict, but are extremely difficult to estimate with a high degree of accuracy. Predicting future mortgage cash flows not only depends the expected behavior of borrower refinances and new home buying trends (see explanation above)....it depends on the anticipated volatility of benchmark yields (TSYs).
Investopedia's Plain and Simple: Volatility refers to the amount of uncertainty or risk about the size of changes in a security's value. A higher volatility means that a security's value can potentially be spread out over a larger range of values. This means that the price of the security can change dramatically over a short time period in either direction. A lower volatility means that a security's value does not fluctuate dramatically, but changes in value at a steady pace over a period of time.
What do lower interest rate volatilities have to do with the beginning of the month?
The US Government has scheduled the release of its Employment Situation Report (Nonfarm Payrolls) on the first Friday of every month. Without going into further detail about why....the Employment Report helps reduce the implied volatility of interest rates!
Lower implied volatility means a tighter path of expected interest rates in the future (lower option cost) which implies less risk in investing in MBS (tighter yield spread) which means investors will have stronger demand for MBS!!! Great timing considering portfolio principal prepayments will be deposited into my trading account.
Supportive Event #3: Attention to Settlement
In the TBA MBS market, at the time of the trade, the buyer and seller agree to the type of MBS (FN,FRE,GN), the coupon, and the price...they do not however provide the specific pool details of the trade. Trade settlement dates are pre-announced every month by SIFMA. Two days before settlement date sellers are required to notify (notification day) buyers of the specific details of the pool that the buyer agreed to purchase from the seller. The pool details are required to meet specific standards that were agreed upon at time of trade. Two days later the trade is settled!
These events occur at the beginning of every month. As the calendar grows closer to settlement date MBS market participants begin to pay much closer attention to the TBA MBS market because a profitable opportunity may arise. This takes fixed income investors attention off of other relative value securities and focuses it more intensely on mortgage world!!!
These three events combined are very supportive of the MBS market....which is why we get all excited as we near settlement date!
MBS Market Alerts
