Here are closing price levels.  Though we did not get beat up nearly as bad as treasuries, it was still not a pleasant day for MBS.  As you'll be able to see on the chart, we experienced a very smooth and slow price decline all day.  This carried on what began yesterday where all of the gains we realized this week slowly leaked away to just below their worst levels of the week by the end of trading today. 

 

FN30_______________________________

FN 4.0 -------->>>> -0-09  to 99-25  from 100-02

FN 4.5 -------->>>> -0-07  to 101-22  from 101-29

FN 5.0 -------->>>> -0-05  to 102-29 from 103-03

FN 5.5 -------->>>> -0-05   to 103-22 from 103-27

FN 6.0 -------->>>> -0-08  to 104-18  from 104-27

GN30________________________________        

GN 4.0 -------->>>> -0-11  to 99-31  from 100-10

GN 4.5 -------->>>> -0-09 to 101-30 from 102-07

GN 5.0 -------->>>> -0-06  to 103-14  from 103-20

GN 5.5 -------->>>> -0-09   to 103-29 from 104-06

 

Here's the daily chart in 10 minute intervals. As you can see, we broke through the "cool dude" line with certainty, but continued to stay above the "red line of certain and impending death" which would be a potential indicator of a more pronounced momentum shift.  On the bottom portion of the chat, you can see that treasuries (yellow) continued their 2nd day of very low volatility directional selling with the yield backing up to 2.949 on the 10 yr.  This was 31 ticks down in PRICE on the day.  Stocks ended just 6 points to the positive after losing most of their luster late in the day.

Then there's the Day over Day chart which shows us approaching the "red line of certain and impending death" for a third time now (except it's rendered in grey below).  Next week will either be the bounce that keeps us on an uptrend, or the break through that level which could lead to more negativity.

There are two different uptrends we could draw on this day over day chart.  One will be in Yellow below, and the other in red. 

If we go off the read line which has 4 "touches" we broke that late last week.  However, if we go off the more conservative yellow line, we only broke that today and would require confirmation of that trend breaking on Monday.  So what are the chances of that happening on Monday?  Let's take a quick look back at this week and then look ahead to next week.

One common theme this week has been the comparitively low volume.  Against the 30 day average volume, this week stood just under 80% whereas the week before was just under 120%.  That's quite a week over week shift.  As we discuss, low volume gives way to potentially more dramatic price fluctuations as an average MBS transaction would account for more market movement than normal.  With many market participants MIA this week on extended vacations, spring breaks, or whatever else, the dearth of action was apparent across most sectors.  Supply picked up big time near the middle to late part of the week, and whereas the Fed was more than dry enough of a biscuit to sop that up previously, the bid side was outnumbered yesterday and today, with the former seeing $6 bln + in originator selling.  Even then, the average supply remained in line with last week's healthy showing coming in around $4.5 bln per day.  Not so long ago we referred to anything over $1.5 bln as healthy.

On the week, spreads tightened most in the lower end of the coupon stack as investors are finally beginning to fear the prospect of increasing prepayments in higher coupons due both to the historically low rates and the various governmental efforts to stamp those rates on new mortgages for as many American homeowners as possible.  The relative value of those higher coupons, from a trader's perspective, starts to decrease when the chances of the loan being paid off become more and more imminent.  After all, If a 6.0 MBS is over 104-00, that means I'm paying $104,000 for every $100,000 of principle.  So you might understand why I would NOT like it for those borrowers to refi right away and pay me off with $100,000, until I've had time to collect sufficient interest to make my $$.  Long story short, buying these higher coupons was an increasingly popular fade that didn't definitively shift until this week.  The opportunistic buyers sticking around for the potential delicious pinata guts overlooked by the more impulsive buyers finally conceded that they too would have to join the pack, including the fed, south of the border, down 4.0% way.

Speaking of the Fed and 4.0% way, Thursday night's post shows the Fed's buying for this week.  Much in line with the moral of this week's story, the Fed too, exhibited signs of "extendo-vacation" as net MBS purchases were down around a third from the 2 week's prior.  You wouldn't know this by looking at spreads which ended the week near their lows.  And that piece of knowledge right there might be a great indication as to why we didn't see more Fed participation.  I'd actually argue that the lessening Fed bid this week will keep the price patterns of MBS MORE stable in the long run.  Why?  Well, if the Fed had come in as big as all us originators would have liked this week, the spread tightening we did see would have been even greater.  Why is that so bad?  The tighter the spread, the less incentive fixed income buyers have to buy MBS over whatever benchmark that spread is being measured against.  In other words, if I'm looking at two potential fixed income investments, one a10 yr treasury with no risk, and the other a 4.0% MBS with some risk, The closer the yield on the 4.0% MBS is to the yield on the 10 yr treasury, the less and lease likely I am to buy the MBS when I'd only need to sacrifice a little bit of return for utter security.  In that sense, it behooves the fed, and all of us really, to keep spreads on as stable a directional pattern as possible.  So the story this week was more about a harsh treasury sell-off that couldn't help but bring MBS with it to a certain extent.  This too, is why next week will have much to do with treasuries as it will be all but a necessity for a positive week in treasuries to eek out a "W" for MBS.   Legend has it that if the Rangers beat the Caps, ancient and mysterious NY forces will come to the aid of Wall St. and MBS will rally. 

And so it is that we all prepare for MBS to plummet...  Sorry Ninja (Ranger's Fan)...  We had to have a little fun on Friday.  Rangers 1-0 after first game in D.C. no less!  So maybe an upset's possible?  But back to biz...

As far as the Fed buying that DID take place, the highest single coupon purchased was JUNE Fannie 4.0's.  Granted 4.5's overall still took the majority when MAY deliveries were included, but the significant portion of JUNE 4.0's means SOMETHING.  Now, if someone would just tell me what it is....  I'm thinking that the Fed buying that many "off the run" coupons on the lower side of the current market might be some sort of hint that at least in part, they think that's "where the party's gonna be at" come delivery time.  We shall see....

In other news:

  • Some housing data related euphoria waned this week as several key reports took a turn for the worse.
    • Housing starts declined to 510k versus a consensus of 540k.  February was also revised 11k lower to 572k from 583k.  One silver lining here is that most of the drop is attributed to multi-family homes which fell a whopping 42.6%
    • Foreclosure filings were up 17% from February and up 46% year over year.  On a quarterly basis, this is a 9% increase.  1 in 160 homes filed for foreclosure this quarter.  In part, the increase can be attributed to the lifting of foreclosure moratoriums by some of the nations biggest banks.  
    • The MBA purchase index more than reversed its previous gains, as it fell 11.3% to 264.1.  However, it was noted that the MBS did not adjust for the holidays.  Refi vs. purchases according to the MBS was more or less unchanged.
  • The aforementioned Euphoria was attributed to two reports that came out earlier in the week providing glimmers of hope
    • Homebuilder Sentiment rose from 9 to 14 last month with sales expectations rising from an index value of 10 to an index value of 25.  We have the full breakdown of the numbers in Wednesday's blog.
    • The NY Manufacturing index and the Philly Fed index both showed noticeably better results than those afforded by bleak consensus estimates.  Though the data on the week was a mixed bag, these two reports stood out to some (or maybe just to CNBC) as big fish for the numerous "bottom callers" out there.  Don't count us among them, but there you go...
  • Ask Freddie Mac, and they'll tell you that the average 30 yr fixed mortgage sits at 4.82% this week, down .05% from last week.  And 15 Yr fixed loans declined to 4.48%, both just a hair away from all time lows. 

Around the Corner:

As the after-effects of "MBS Happy Week" began to wear off on Thursday, we are now transitioning into a sort of void of data and directionality indications.  Historically, MBS have not fared well in an absence of data.  Though none of the historical periods with which I'm familiar had several billion dollars a day of default Fed support.  So much remains to be seen as we sit now at our third test of the price floor on 4.0's.  Last time we were above that level, we bounced on that third pass and broke through on the 4th.  We have a prepayment report around the corner and as discussed in the beginning of this post, the fears of increasing prepayment speeds are beginning to materialize as evidenced by the consensus for this round to show a 20% increase in speeds versus March for Fannies.  As would make sense, 6.0's and above are expected to suffer the worse.  Traders are currently "baking in" a certain percentage of these expectations into current trading.  If speeds are slower than expected, we might see some "at the buzzer" renewed interest in those higher coupons which could put a damper on an otherwise sideways day some time in our near future.  If, on the other hand, we are in fact speeding up, and perhaps even faster than the consensus, look for the MBS bid to continue to migrate south for the summer.

Next week is as dead as they come in terms of scheduled data.  Indeed, the only items on the agenda through Wednesday barely qualify as junior varsity.  Even then, since no one really pays attention to weekly jobless claims any more, the only "baller" of the week is Durable Goods, which doesn't arrive until Friday.  Yikes!  That means we will be left to the machinations of treasuries, stocks, prepayments, originator supply, and some hefty treasury auction announcements, all of which (with the exception of originator supply) tend to act more on the volatile emotional centers of the market's brain.  This should make for a fun week for us all, with a fair amount of fluctuation, and barring a turnaround in tsy's some more Red day over day price change columns to look at.  If you're looking for an indication of how bad things COULD be, take a look at the last time we dipped below 99-20 on the 4.0% coupon.  Granted we knocked back on that ceiling a couple times, but it was nearly TWO MONTHS before breaking back above.  Now now...  Past precedent does not indicate future performance, but these technicals can be very crafty sometimes. We'll have to keep an eye on that good 'ol 4.0 on Monday, and if she goes much lower than the 99-25 where she currently sits, we'll have to more and more seriously take a look at buckling in for a month or two of down time. 

Or all that could be out the window as SOMETHING ELSE UNPRECEDENTED happens.  Heck...  Seems like we got about a 50/50 chance of that on any given week.  Waiting to find out is half the fun.  Just think of all the excitement your heart will be able to handle if you can make it through 2009 in the mortgage industry!  You find out as we find out, which as always, will be before everyone else!  See you next week and have a safe weekend.