The latest alert on the MBS Live Dashboard at 11:15am works just as well about an hour later to explain current goings on:
Dealers Set Em Up, Fed Knocks Em Down. Bonds Rally Post-POMO 11:15 AM
The long end of the yield curve rallied into the Fed’s POMO (permanent open market operation), which this morning, is an outright purchase in 25-30yr space. Of the $4.56 bln offered, the Fed took $2.51 bln, good enough to give prices another jolt higher in Treasuries, bringing 10yr yields down into the 1.85’s.
MBS have followed suit, experiencing a similar jolt. Fannie 3.5’s shot up about 5 ticks from 102-16 to 102-21. The 2-3 “early to act” lenders might have their fingers close to the reprice button on these moves, but liquidity and volume remain quite light in MBS land, so most lenders would want to see gains stick around for a bit longer or extend further before repricing.
Here’s a shot of 10’s and Fannie 3.5’s from MBS Live:
The last time yields were this low in 10yr notes, we were just on our way up from 1.7’s after a major EU-driven flight to safety, but this time there’s none of that high-volume, panic driven, steep-moving price action. By comparison, the recent rally has been calm and measured. But the key there is “by comparison. The late september rally was a different animal, based on more immediate concerns. The current rally is an ongoing vote of “no confidence” in EU Summits and the like, and is compounded by lower volume, less liquid, year-end trading. At a certain point, the prevailing momentum takes on snowball status, where shorts are forced to cover. Everyone’s a buyer today, and the Fed is taking a good deal of the existing supply in 2 operations (one that passed at 11am and another coming up at 2pm), simply solidifying the omnipresent buy-side.
MBS are merely along for the ride, at least as well as they can be (or as well as they are willing to be) given the even thinner trading conditions in the MBS market. Gains have been slow going compared to Treasuries and reprices merely trickling in so far. Not what you’d expect at these price levels, but expect lenders to be increasingly resistant to pricing in MBS gains when rate sheets are already at record rebate levels for “high 3’s” Best-Ex rates.
By way of a parting thought, yesterday we said the following with respect to 10’s possibly getting into the 1.8’s, “Although we’re concerned with the question of “where do we go from here if not back higher in yield?” things are good for now.”
As it turns out, it looks like the answer to that question is “they go a bit lower.” This is a classic example of markets taking the prevailing “common-sense” and turning it on its head. We thank the markets for reminding us that they tend to act in such a manner as to prove the greatest number of people wrong. This is just something to keep in mind if you find yourself thinking along the lines of the following mad lib:
“surely, insert market sector can/can’t go any higher/lower from current extreme level”
If it seems that obvious, there’s a good enough chance the opposite will happen that you might want to at least be prepared for the possibility.