As MBS tick towards the close, we've pushed back into the middle (perhaps upper middle?) of the day's range. Risk of reprices for the worse are fading as we continue to hold over PAR in what has been a fairly range-bound day (100-03 to 100-10). Because of this narrow range, lender pricing strategies will vary. Some will have played it a bit safer and simply priced in some of the benefit of the positive gap between Friday and today, but with other lenders, there is reprice risk any time we fall to the lows of the day, even though those lows were only 7 ticks under the highs. The narrow range makes the one day charts look choppy...
The frustrating thing about the earlier price weakness is that it was not supported in the futures market, at least not to the extent it normally would be. This goes back to the previously shared thoughts on today's disconnect between tsy's and MBS. If the correlation were firmer today, we could have afforded to be more optimistic about the MBS correction we are now seeing owing to the fact that the september 10yr contract has had a very stable and positive day which looks like it will end up with us testing July 21st highs... (that's good)
Today's strength is somewhat of an illusion however. Sure, the numbers on the screens show a 10 tick improvement in 4.5's, but if we take a look at today in a slightly larger context, we see the truth of today's trading is that predominant range today is exactly in line with Friday's highs. Knowing then, as we all do, that Friday afternoons tend to suck (technical term), we're actually fairly unchanged from Friday. I say "unchanged" because I personally tend to discount most any price movement after the noon hour on most Friday's. Volume and therefor liquidity tend to be lacking during those hours as Ninja and pals scramble to catch their preferred forms of transportation back to their Greenwich McMansions before traffic really picks up. In the chart below, you can see Friday fall off beggining precisely at 1200 as well as today's narrow range dancing back and forth around those 11:59 highs.
All this has occurred amidst relatively low volume in the treasury market, which is not all that surprising considering it's a Monday with no substantive data. 10yr futures are only at 561k at the moment in terms of volume--not abyssmal, but not active by any stretch of the imagination. The coarser lines in the MBS charts however are a function of the narrow range more than the volume. In fact volume today in MBS was well above normal with 30yr FNMA paper crushing recent volume averages by about 3 times. This does not bode well for a facemelter tomorrow as the spike in volume coinciding with the "leveling off" vibe given off by the three day chart equates to a sort of "vote" by market participants for the recent gains in MBS to level off.
This has the effect of gapping out spreads today today, a trend that will likely continue into any continuing gains. That's not necessarily a bad thing for us mortgage broker types, as it releases some of the pressure build up in the uber-compression machine known as the ever-tightening MBS spread game. Data will have to be friendly and stocks weak in order for tsy's to add on to recent gains. You can see the "bottoming out" there as well. Now whether or not this is any sort of a medium or long term bottom is completely unknown, but the short term price patterns are suggesting the following... If your lender really coughed up the gains this afternoon, it's time to take some profits. Or if you fancy your chances trying to make it through housing starts and PPI tomorrow before rates come out, you might be able to catch a few more bps in YSP if prices hold steady (relatively) in the AM. But the bottom line is this... Just as we advised floating with the weakness surrounding the 99-00 price level, the same rationale applies here at these PAR+ prices on 4.5's. Just as prices had been extremely hesitant to go below 99-00 causing us to float until they did, they have also been extremely hesitant to stay over PAR for long, causing us to take opposite-type actions (read: locking a larger percentage of pipeline) until we're meaningfully above PAR and holding.
Yes, this could be the third day of an extended rally, the moral of the story for those that want to take a lesson from the past: once your lenders have coughed up a proportionate amount of YSP for these gains, don't go floating everything! Avoid the temptation to continue to float the whole pipe with MBS strength. I'm not saying you should be locking everything up right now, simply reminding you that today's price action should add a pebble on the "lock" side of your pipeline risk scales.
MBS Market Alerts
