Anyone feel like their head is spinning after last week?
Swine Flu, the bankruptcy of Chrysler, a muted FOMC statement, Bank Stress Tests, weaker than expected consumer spending, and the third consecutive quarter of US economic contraction (-6.1%!!!)....sounds like a recipe for stock sell off and rally in mortgage rates doesnt it?
Not the case. Equity market participants chose to focus on the FOMC's "light at the end of the tunnel" statement which indicated that "the pace of contraction appears to be somewhat slower". Bond traders reactively vacated their artificially supported positions on the yield curve after the Fed failed to provide any new monetary assurance that they would continue to support the shape of the yield curve. The resulting trade pushed the Dow a few hundred points higher and increased the 10 yr note yield to levels not seen since November 2008.
Although the MBS market continued to show signs of resiliency, mortgages were unable stand up to the broad shift in bond market sentiment. Towards the end of the week "rate sheet influential" MBS coupons were scorned by all accounts, Fed included, as most market participants hurriedly evaded anything EXTENSION RISK related (read more). This fear of added duration resulted in several reprice for the worse alerts and higher mortgage rates on the week.
Here is the Week over Week FN 4.0 price action...
In other Mortgage Related News....
- The Senate voted NO on "Cramdown Legislation"
- The House Financial Services Committee approved the much contested HR 1728 Mortgage Reform and Anti-Predatory Lending Act of 2009. The House may take a full vote as early as this week...GET ON THE HORN WITH YOUR REPRESENTATIVES IF YOU DO NOT SUPPORT THIS BILL!!!
- The Obama Administration announced an upgrade to their loan modification program. The new second lien program will automatically reduce the payment on second trust or possibly even extinguish the 2nd mortgage. These programs have been unsuccessful thus far...we need these programs to work if the housing market is to lead the economy from recession.
- HVCC POLICY WENT LIVE....UGH
This week the MBS coupon stack will get some added support from beginning of the month "interest rate volatility calming" events (Read More), but we nonetheless continue to battle the skeptical sentiments of yield curve traders waiting for the Fed to reassert their willingness to keep benchmark yields at artificially low levels. The timing of such a reassertion would be warmly welcomed early in the week...preferably before the bond market is forced to choke down another $71bn in government debt. The Treasury will auction $35 bn 3 year notes tomorrow, $22bn 10 yr notes on Wednesday, and $14bn in 30 yr bonds on Thursday. Some Fed "bully pulpit" supportive talk would help offset the possibility that demand will be dwindled as Japanese markets are distracted by their "Golden Week" celebrations. That said.... Treasury traders will continue to hold their defensive postures in the absence of Fed "warm and fuzzy" feelings...this means range bound trading with profit taking rearing its head whenever possible....that goes for MBS as well!
On the equity side of the market...although headlines have indicated an economic bottom is in sight...market participants will remain reluctant to commit long term capital while the timing of a recovery is in question. This implies stock traders will continue to implement short term trading strategies....especially with the release of bank stress test results on Thursday and Non Farm Payrolls data (the big kahuna of econ reports)on Friday.
In terms of MBS demand...the Fed will remain an ever present source of support for mortgage bankers looking to offload supply of newly committed loans (we dont expect high volume from originators this week unless the yield curve flattens). On the other side of the stack, the release of prepay reports on Wednesday night will force profit takers to be extra cautious with their trading positions. Market participants will be very hesitant to pay 105 prices for MBS coupons that fall into the "highly refinanceable" category. So market flows should favor the middle of the coupon stack as most accounts will prefer to stay away from the extension risk that comes along with production coupons and the prepay risk that is associated with anything trading in 104/105/106 price handles.
Beware: any appreciation of MBS trading positions (flatter yield curve induced most likely) will warrant swift profit taking. That means be attentive for "reprice for the worse" alerts and never stray far from your GUTFLOP strategy....
So far today....
Since 5pm "Going Out" Marks....
FN30________________________________
FN 4.0 -------->>>> +0-04 to 99-29 from 99-25
FN 4.5 -------->>>> +0-03 to 101-21 from 101-18
FN 5.0 -------->>>> +0-01 to 102-21 from 102-20
FN 5.5 -------->>>> +0-01 to 103-15 from 103-14
FN 6.0 -------->>>> +0-00 to 104-15 from 104-15
GN30________________________________
GN 4.0 -------->>>> +0-04 to 99-31 from 99-27
GN 4.5 -------->>>> +0-02 to 101-28 from 101-26
GN 5.0 -------->>>> +0-01 to 103-09 from 103-08
GN 5.5 -------->>>> +0-02 to 103-25 from 103-23
GN 6.0 -------->>>> +0-04 to 104-12 from 104-08
UST10YR: 3.1438%
2s/10s: 222.29 bps
DOW: +168 to 8380
The Fed had its largest POMO purchase yet today...it bought $8.5 bln in the 2016 to 2019 maturity bucket. This implies the Fed is looking to directly influence/assist mortgage rates by lowering our basis. Remember: when determining the value of an MBS coupon..one must compare its returns to those of a benchmark. The Treasury Notes the Fed bought today are the coupons used to compare MBS returns...Fed buying of these Treasury notes is MBS Supportive!!! (Look for Treasury traders to take profits though...there's that short term conviction!)
If its not direct support...its indirect! Thank you Fed....
MBS Market Alerts
