Yields plummeted overnight and again this morning, giving chase to a massive global stock market sell-off due to rapidly rising coronavirus fears.  MBS did quite well on an outright basis, but lagged horribly behind Treasuries in terms of day-over-day gains.

MBS and/or mortgage rates "lagging" the movement in the Treasury market is a blessing when Treasury yields are spiking, and actually also sort of a blessing when rates are falling--even though it might not seem like it at first glance.  After all, don't we WANT mortgage rates to drop through the floor at as fast a pace as possible?

Sounds great in theory, but in practice that causes all kinds of issues.  Those issues, in turn, cause MBS valuations to take a hit.  Those valuations, in turn, cause mortgage rates to move back up or cease their improvement, and suddenly, we're right back to where we would have been if MBS simply lagged Treasuries in the first place.  

In other words, the mortgage market has learned its lessons from decades of experiences with massive rate rallies.  Lenders and traders both know that everyone gets burned when mortgage rates are dropped too fast.  Lock commitment suffers.  Loans are paid off early enough to cause lender penalties (that's right, borrowers... there may not be prepayment penalties for you anymore, but they definitely still exist for whoever did your loan), and borrowers incur a few extra sunk costs on one refi too many.

As such, it's no great surprise to see Treasury yields plummet to nearly all-time lows (1.35% 10yr yield today vs 1.32% in mid-2016) while some lenders barely adjusted rates at all.  In lenders' defense, they adjusted rates quite nicely on Friday and were already very close to matching their own long-term lows from 2016.

Be aware and be warned: there's a limit to how far the bond market will go to price-in coronavirus impact and it's absolutely already pricing future weakness.  That means the bounce can happen well before the economic data actually confirms that a corner has been turned.  In fact, we could see a technical bounce while the data continues to deteriorate simply because traders know things will eventually turn around.  Really all that's needed is for the market to have a solid idea of how far other traders will go to price-in the economic hit from the virus.  Once that's established, rates could bounce any time.

For today though, celebrate the victory.  The average mortgage rate matched 2016's lows, making this a tie for the lowest levels in 8 years.  Also worth celebrating is the fact that a spike in Treasury yields would likely give the mortgage world at least a day of warning to get loans locked without much of a hit (if any) to mortgage pricing.  The only trick will be distinguishing a head-fake from the real thing.  Tune into MBS Live for daily discussions and videos on exactly that topic.