Morning MBS price behavior has paced the behavior of comparable benchmark TSYs....basically its all about yield spreads and relative value....as in MBS coupons are either RICH, CHEAP, or NEUTRAL (compared to their benchmarks).
Thus far "rate sheet influential" MBS coupons have been able to build substantial price momentum due to the corrective conduct of the yield curve. The 10 yr TSY is up 20 ticks (20/32) in price yielding 3.53%....about 10 basis points lower than 8am state side open. The 5 yr TSY is up 7 ticks yielding 2.38% based on bid side price. The steepness of the yield curve, as measured by 2s vs. 10s, is about 7bps flatter at 259 bps after opening near 266.This yield curve improvement is essentially a corrective adjustment following the chaotic capitulation-esque Wednesday trading session. Woohoo...(cautious)
In terms of defining what is Rich, Cheap, and Neutral here is a chart of the FN 4.5 yield vs. US 10 yr. yield (difference = spread) that will illustrate the correlation between higher MBS prices and Rich/Cheap valuations (relative value=valuations)
Notice as the yield spread between the FN4.5 and the US10yr approaches "TOO CHEAP" levels...prices of the FN 4.5 rally. "TOO EXPENSIVE and it sells. "NEUTRAL" and it goes sideways.....
(Assumption in this chart: Treasury prices rallying)
What does this Mean for Mortgage Rates?
Rate sheets are noticebaly better this AM...but lenders are still keeping a cautious cushion (market that quick to forget?)...not to mention its the end of the month and lenders are busy making sure any late minute rushes are getting to the table and secondary is counting their cash, helping calculate commissions (smaller lenders not the big boys), and ensuring closed loans are packaged and delivered by expiration date (I hate taking extensions).
But we will say this...
In terms of spread analysis...just last week the current coupon (FN 4.0 at the time) was +70/10yrs. At the moment the current coupon is +90/10yr....so compared to the spread levels the Fed has kept "rate sheet influential" MBS coupons hovering around over the past month...there is still a good amount of room for MBS to outperform TSYs....so thats the story for seeing continued MBS price momentum.
The flip side is market participants may be hesitant to "jump the gun" and let spreads get too tight because this rates recovery (TSY rally) may be soon viewed as overbought. That is unless the previously discussed negative fixed income fundamentals have already been forgotten? (Distorted Perceptions!!!) Is the market really that quick to forget "Black Wednesday" ???
Remember..its all about Rich, Cheap, or Neutral
YES...THIS IS A FACEMELTING RALLY. Lenders should be willing to show a little love with a REPRICE FOR THE BETTER
Cautiously floating...watching TSY futures.
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