At the beginning of the week, and even during the morning hours yesterday, prices of Fannie 3.5’s (dominant production coupon for conforming 30yr loans), could still be thought of as being in their November range, albeit near the high side. But beginning with yesterday’s 10yr auction, MBS were cordially invited to go on a tear higher in price with longer-date Treasuries. Even though they haven’t been allowed to ride in the front seat (read: underperforming / wider spreads …. as is normally the case into solid Treasury rallies) they’ve kept pace well enough to now sit at their highest levels since early October.
The following video clip from the MBS Live Dashboard provides a sense of just how orderly and premeditated the two day rally has been.
Also looking rahter orderly has been the extent to which stock prices and bond yields have generally been moving in the same direction so far in December. Of course this is more often the case than not, but they’ve been showing a greater than normal likely due to the fact that both have been paying plenty of attention to European markets and lack the conviction to make big, divergent moves of their own accord, especially into thinly traded December.
And so it is that when we DO see “divergent moves,” they’ve normally been occurring in concert with at least one other major market complex. Ignoring the breakout in the Euro that also coincides with the following two charts, here’s the recent divergent moves in SPs and 10yr Yields:
Similar break lower past an existing, downwardly sloped trendline in 10yr yields.
While this may go some small way toward mere explanations of what’s happening and why, there are other forces at play specific to MBS that bear mentioning. You may have noticed a decided lack of positive reprices today. It’s not that we’re not seeing any, simply that they’ve been LATER and less frequent than a similar rally would suggest. That will continue to be the case at current levels. An earlier alert from MBS Live discussed this in more detail:
“A few lenders have repriced for the better today, and it remains a possibility that more could follow, but we have to keep in mind that with rates effectively at all time lows, lenders’ incentive to improve rebate further is about as low as it can be for a 10 tick rally. Also, keep an eye out for pipeline control reprices at lenders who have a history of such things or who otherwise seem to be getting overloaded with new locks over the past two days.”