MBS RECAP: 9/21/2011


Bond markets got the “active” twist for which they were hoping when the Fed said today that it would sell $400 bln worth of 3month to 3yr Securities and reinvest them in longer maturities as follows:

– 32 % in 6-8 yrs
– 32% in 8-10 yrs
– 4% in 10-20 yrs
– 29 % in 20 to 30 yrs (surprisingly robust vs expectations)
– 3 % in TIPS

It’s no coincidence that 10yr yields are in line with their lowest, most hopeful levels of the day as the FOMC announcement gave bond markets every bit of what they’d hoped for. This also confirms that the ramping up of intensity of Fed verbiage and action seen in the last FOMC statement was not a one-off deal.

Specifically, 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.

Reprices 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 afternoon.

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