In case you missed the most recent commentary, start with that as there is no fundamental change to the price action between then and now. Additionally, that post takes step back from the normal level of detail and specificity in order to talk about some of the broader considerations of trend analysis. That's especially important on a day like today because even though not much happened between the afternoon commentary and the close, prices did tick down once more toward the trend-line. And once again, the results add significance to tomorrow's movement. Take A look...
Remember we discussed earlier that our data set is extremely robust in order to get every last piece of data we can. Whereas other data feeds might eliminate enough of the noise to make the curve stay above the trend-line the entire afternoon, it's normal to see these sorts of spikes. Not only do the modal trading ranges sit above the trend, but the violations themselves are not extreme enough to be statistically significant. All that to say, don't worry that the price curve crosses the line a few places as it's only something that shows up in the first place because we have a Tim The Tool-Man Taylor mentalilty when it comes to data acquisition...
To reiterate points from the previous commentary, this relatively well-behaved adherence to the long term trend DOES NOT mean that this trend is any more likely to hold up tomorrow, but rather, IF IT BREAKS AND THE SEVERITY AND DIRECTION OF THE BREAK ARE CONFIRMED ON THURSDAY, that we are more likely to see trading continue UNDER the trendline as opposed to over it. As far as tomorrow is concerned, we'd need to see a sizeable break in order to draw these conclusions without the additional confirmation from Thursday's session. Even then, with such pertinent data on tap over the next several sessions, I'd even be tempted to keep the jury out unless things were obviously horrible.
Also don't foget the inherent 10-12 tick loss in current price levels we'll see when settlement rolls around next week. As we've said before, this does not mean that MBS are weakening by 10-12 ticks!!! Simply that the prices of a given coupon will have to factor out an "accuracy premium" as the new "on the run" coupons will have another month of uncertainty to account for beyond the current crop that's close enough to finish line to call the race.
Plain and Simple
MBS coupons always have a designated delivery month. This is simply the date on which parties who have committed to sell those MBS must then "package" and deliver those MBS to buyers. If the settlement process is occurring in the very near future, there is a much smaller price associated with the risk of price changes between now and then. On the other hand, if I'm committing to sell you $2 bln of 4.5's in 30 days, the price we agree on today has a higher chance of being out of the market than the actual trading price at the time of settlement.
This is exactly the same concept as locking a loan!!! For instance, if a trader is anticipating a drop in MBS prices, they might choose to sell MBS now at a higher price than if they pulled the trigger nearer to settlement. The parallel would be you locking a loan at today's rates in anticipation of an impending drop in prices (rise in rates). Just as you would have gotten the best end of the deal with your lender, so too would that trader profit from the well-timed sale...
On The Docket Tomorrow
7:00 leads off with the weekly Mortgage Application Survey from the MBA,
8:15 ADP Employment report. Although we always make fun of just how "off" this has been historically, it seems to be gaining more and more esteem in the financial community.
10:00 Factory Orders (Jun) and ISM Non- Manufacturing Index
In addition, Treasury will announce next week"s quarterly refunding needs in 3s, 10s and 30s - estimated at $77 bln
On a Final Note...
What are your thoughts about "leadership in the mortgage industry?" It's been the topic of a few commentaries around here and elsewhere over the past few weeks, including Berliner's Commentary On The Community Page. With impending drama surrounding yet another congressional bill, how important is this to you and what remains to be said on the topic? Comment here or comment there. Or even write your own community commentary. (and by all means, don't limit yourself to that topic if there is something else you're more passionate about within the mortgage industry...)
PS...If you missed the discussion on TBW. HERE is pertinent info
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