MBS RECAP: Living up to Not-so-Great Expectations


Bond markets began the day by extending yesterday’s late weakness in somewhat of a panicky fashion.  By tapering only by a small amount and by promising low rates “well past” the time unemployment hit 6.5%, the Fed dropped a bomb that made a loud noise and a big flash, but did very little immediate damage.

As those of us in the immediate blast zone looked around and noticed we were generally unharmed, confusion quickly mounted.  “So what now?”  Seriously…  The fed just tapered and bond markets are flat at 3pm.  This wasn’t in the playbook.

If you’ve ever seen a kid take what looks like a bad fall and handle it admirably without crying UNTIL they realize that all the adults in the room are looking on in terror expecting shouts of pain at any moment, you know what happens next. The “expectation” of selling was reason enough in itself.  Even for traders in this situation, if you think that everyone else thinks that selling is the thing to do, then that’s what you do until it doesn’t look fashionable any more.

That’s generally what happened in the last two hours of yesterday and the first hour of today.  That’s why data didn’t matter  As soon as the herd stopped running, the day was over.  MBS leveled off and went perfectly sideways into the close.  Treasuries were even more perfectly sideways, holding inside a consolidative triangle all day long.  I’ll talk a bit more about why that stinks tomorrow morning, but here’s a hint: it will have something to do with accepting one’s fate even if that fate is pretty depressing.

3:29PM  : 
Fannie Selling Guide Update: HPML Definitions, ATR Exceptions
This Announcement describes selling policy updates that will be included in a future version of the Selling Guide. The effective date of each update is indicated below. The changes include:

– Margin Thresholds

– Definitions of Higher-Priced Mortgage Loan and Higher-Priced Covered Transaction

– Exceptions to Ability to Repay Rule for Certain Transactions

In addition, the following documents have also been (or will be) updated:

-Fannie Mae Requirements for Document Custodians

-Instructions to the Uniform Residential Loan Application (Form 1003)

Here it is….

3:20PM  : 
MBS Within an Eighth of Unchanged After Treasury Close
While Treasuries continue to trade until 5pm, the unofficial close (marked by the end of the open outcry session at the CME) is 3pm. This also characteristically marks the end of the most active time of day for Treasuries and other fixed-income securities that trade in close proximity, like MBS.

As such, we tend to take post 3pm movement with a grain of salt. Many bond market participants are done for the day after that. All that to say: MBS hit their best levels of the day heading into the 3pm close. That’s positive.

Less positive is the fact that 10yr yields didn’t break back below the 2.92 technical level. This has come into play on several occasions in 2013 and was the first line of defense against yesterday’s sell-off. While there’s no epic implication of negativity, closing below would have been positive. Closing above leaves tension in the air going forward.

Despite that tension, MBS have been happy just to get some stability. Today’s entire move back toward unchanged levels has been made possible by Treasuries finding their footing at 9am. Several more lenders have joined in with positive reprices in the past few minutes, and it remains a possibility for any lender that hasn’t gotten involved yet.

12:31PM  : 
Check Out Claims Volatility [Chart]

This makes it easier for traders to disregard this morning’s big Jobless Claims miss. The series has been so uncommonly volatile that it simply can’t be trusted in either direction.

Jobless Claims Volatility

11:03AM  : 
Off The Lows; Waiting on Auctions
After some quick and fairly steep snowball selling this morning, bond markets have their feet underneath them to some small extent. MBS and Treasuries are still decidedly weaker on the day, but not as weak as they were.

Fannie 4.0s are down 7 ticks (vs 14 earlier) to 102-27 and 10’s are up just over 4bps (vs 7 earlier) to 2.9291. These levels are right in line with long term pivots, and the real risk is that 10’s will treat this as a floor of resistance for the rest of the day. The period following the 7yr auction at 1pm is the only time we can really know how that’s shaping up.

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