MBS Going Out on a High Note in 2011


September 21st, 2011 was a very important day for MBS, perhaps the most important since the Fed initially announced their intent to purchase MBS outright beginning in 2009.  Until 9/21/11, there were no guarantees of ongoing Fed sponsorship of MBS markets beyond previous QE-related commitments.  The FOMC announcement on 9/21 specifically stated that the Fed would reinvest the principle and interest payments of it’s roughly one trillion dollar MBS portfolio back into the TBA market. 

Here’s a walk down memory lane if you’re interested: MBS ALERT: FOMC Rocks Markets. Reprices For The Better.

the recent widening of MBS spreads may have been effectively reversed
today as our namesake made singular mention in the statement when the
Fed committed to reinvesting proceeds from MBS payments and payoffs BACK
INTO MBS as opposed to elsewhere in the fixed-income world. That’s a
huge boon for MBS vs Treasuries.

Bottom line, we think this
confirms that it’s safe to get into 3.5’s as the dominant MBS coupon and
the statement is the first indication that “it’s only a matter of time.
Fannie 3.5’s are up 1 pt and 7 ticks on the day (39 ticks) to 102-29.
The previous “concrete ceiling” was 101-25 and is now demolished. 

for the better should be on the way this afternoon, but keep in mind
that lenders can’t just immediately adjust pricing to reflect changes in
MBS. It will be a slower and more gradual process than some of us might
expect, but average rates in the high 3’s are on the way (probably!).
And that should begin with some moderate reprices for the better this

We went on to suggest that this may have marked the moment in time that the recent runaway widening in MBS spreads would see its peak.  All the aforementioned “stuff” turned out to be pretty accurate as far as that whole “predicting the future” thing goes, but even though spreads indeed have gone no higher/wider than their peaks from before 9/21, they have been consolidating in a triangle pattern–storing energy for a breakout in 2012.  This is pictured on the chart below and is the best pictorial “story of the MBS Market” for 2011, and the manner in which this triangle is finally resolved will very likely be the story of 2012.  Note how the bounce in spreads occurred at the somewhat symbolic pivot point marked by the onset of Fed buying.

As far as MBS prices themselves are concerned, they haven’t fallen under the 80-day moving average since they broke above in mid April, and the FOMC meeting in September was a huge confirmation bounce.  Since then, we’ve simply been trending higher and now–with the exception of the “sugar high” produced by the FOMC meeting, are headed out the door at the highs of the year:

10yr yields are similarly not quite back to their “sugar high” levels following the September FOMC meeting (where Operation Twist was announced), but apart from those heady levels are also headed out the door in their lowest territory of the year.  It’s almost uncanny to observe the the very highest yields seen since the late July rally align almost perfectly on a pivot point with the very lowest levels from 2010.  It’s as if a line in the sand has been drawn, delineating “THEN and NOW” as two distinctly different eras.  That might turn out to be very true, but even if it doesn’t, the supportive levels seen around 2.25% and 2.40% in 10yr yields will be good levels to watch as indications that play time could be over (although we could very well be waiting more than just one year for that to happen unless some SERIOUS progress is made in Europe).

Unlike bond markets, stocks have not been operating near their recent extremes, instead favoring something of a middle ground between the year’s highs and lows.  Reducing explanations for this to their most oversimplified format, this could either mean that the US TSY trade is too crowded with EU-inspired flight-to-quality money or that stocks simply have yet to realize the full extent of their EU-inspired pain and are destined to plummet.  Perhaps some from column A and some from column B–in what proportion is anyone’s guess.


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