Please be sure that you are sitting down.  It appears that MBS are actually tightening to treasuries!

I know.  I'm as shocked as you are.  Well, actually, we knew it would happen some time, at least any of us felt this way who agreed with Chase's report on MBS yesterday calling the headline risk "significantly skewed towards a sharp tightening," and the historically wide spreads "fantastic." 

At any rate (pun always intended), here is a graph of what the kids "on the street" call "the basis."  As opposed to a graph of yield versus yield, which is what we normally are referring to when we talk about spread, the basis is a simpler price vs. price comparison that has not yet factored in the current state of defaults, prepayments, etc... for mortgages. 

The red line represents 6.0 pricing whereas the teal line represents 5 year treasury pricing.    You can see treasuries leading the way all through the morning, but then Emeril shows up and "Bam!" a nice crossover and mortgages are rockin'.  At least for now.  Hey!  Even if the analysts over at Deutsche Bank are right and spreads are going to keep going wider, something is better than nothing right?! 

Reasons for this?

• The markets have imbibed their proverbial Bloody Mary in that enough time has passed without meteors falling from the sky and landing on Fannie and Freddie that they can start to relax a bit.  And so to extend the metaphor, whereas the markets were kind of "hung over" this morning with respect to MBS, the risk-aversion that was motivating that (intoxication IMHO) is waning.  Thank you Blood Mary.  That's only part of the puzzle
• Freddie's auction that we spoke about earlier was not struck by fiery meteors either.  Hmmm...  Maybe there's a tinge of panic making it through to the media and indeed the markets as a whole that might not be entirely justified?  Who knows!  Not me!  But what I do know is that, at least for another day, we can forego that phone call to Bruce Willis out on his oil derrick and be spared the "acting" of Ben Affleck. 
  

We had a decent amount of volatility yesterday after the close which brought prices down.  This usually happens because liquidity dramatically decreases at the technical "close" of 3pm.  So fewer trades are having more of an impact.  Perhaps we are even on the day because of that correction, or perhaps we needed to have this morning's gains to be even today.  Whatever the case, we are in good shape now.  "Float Club" continues.  We can still see something like yesterday where prices fell off after 3pm.  What is not so common is what I saw from a few of my lenders which was post 3pm price changes for the worse.  Granted this only happened with a few lenders and granted we got a warning out about that about an HOUR before any reprices, but still, something to watch out for today if prices slide late.

Still, we will be reassessing at close today.  Hard not to be a floater with recent events, but also, we're approaching levels where we've seen resistance in the recent past.  If you're nervous, or can't afford the loss, no one should be embarassed about locking today.  But if you have a week or two to ride out any unforeseen variables.  And you can accept a potentially sizeable loss should the market throw a couple tape-bombs, "everyone floats at Float Club."

until the next round, 

-TD