Yesterday we enjoyed a "flight to quality" induced Treasury rally which lead "rate sheet influential" MBS coupon prices higher.
Appreciating MBS prices brought about lower mortgage rates and a generally more optimistic mortgage originator environment. Although MBS trading volume reflects an apathetic summer attitude, the price improvements we have experienced over the previous four sessions have served to bring mortgage rates down towards 5.00%...
When the smoke settled following the panicky sell off in stocks, the 10 yr note yield had fallen 10bps from Friday's close. This happens to be a key technical resistance level...the 62% retracement of July yield lows. We are still waiting for this resistance level to be broken with conviction.
Although the run to risk averse assets (flight to quality) pushed mortgages into new prices handles (FN 4.5 back over 100-00)...MBS investors were left wondering if the recent rally really has legs. Consequently MBS buyers (non-Fed buyers that is) showed minimal "down in coupon" interest yesterday.
Why did prices move higher then?
More than anything, MBS price appreciations reflected a need for traders to adjust prices while benchmark yields were benefitting from a risk averse appetite. The lack of interest from servicers, real money buyers, and levered day trader's was obvious as TSYs outperformed MBS (wider yield spreads/TSY yields fell faster than MBS yields) and further illustrates the MBS market's willingness to "wait and see" before adjusting hedges and portfolio durations.
The choppy interest rate environment is exhausting for MBS investors. Until a trend is confirmed MBS investors will likely continue to day trade "up in coupon" (5.5s and 6.0s) while other accounts who have specific hedging requirements continue to use derivative products to manage risk (instead of buying and selling MBS). WAIT AND SEE....WAITING FOR CONFIRMATION...DAY TRADE.....
This unknown interest rate environment has negative effects on your rate sheets. While the market is attempting to determine which direction it goes next...lenders will not be willing to add risk their pipeline. Specifically as volatility ticks higher it becomes more and more expensive for lenders to hedge their pipelines ...this added cost is passed down to your rate sheets. Furthermore, if interest rate volatility falls and interest rates decline...the chance of borrowers walking away from locks increases. This is referred to as "fall out risk" and can be an expensive cost for mortgage bankers. This is why your rate sheets often times do not immediately reflect rapidly appreciating secondary market price movements.
This morning MBS trading is once again SLOOOOW as mortgage sales desks are occupied by the JV team (ninja's term). This means MBS will continue to lag the directional leadership of benchmark big brothers (TSYs and swap curve). Price action has been a bit choppy as "rate sheet influential" MBS coupons continue to loathe higher price (illustrates effect of negative convexity in trading environment).
Today's intraday reprice risk remains high as we are pacing the movements of the yield curve. This implies MBS coupons may be at the mercy of the stock lever today. If tepid TSY traders find reasons to take profits as stocks attempt to retrace yesterday's losses...MBS prices will suffer. If we can remain range bound...look for the FN 4.5 to find its way back to 100-00.
On equities...stock markets closed near the lows of the day illustrating mounting skeptism regarding the extent to which a rally in equities would continue. This morning volatility remains high in stock markets and volume is low. We continue to focus on consumer fundamentals and the effects on expectations for future corporate revenues. As the economic outlook is no clearer than it was a month ago...we do believe econ data will have more of an effect on markets...however will not lose track of technicals.
Its still a trader's world...and floating remains super risky. Waiting for confirmation...day trading the volatility.
Rate sheets are generally worse...
News:
Housing Starts Fall in July. Revised Lower in June and May
Ginne Mae Pres and FHA Commissioner Start New Firm
Fed Loan Survey Indicates Tigher Lending Standards. Consumer Demand Falling
S&P Looks Into Servicer Performance
MBS Market Alerts
