MBS RECAP: Rallied and Rallied Some More Following Bernanke, Month-End Buying

We’ve discussed month-end buying in various contexts in the past and one of them is to fill portfolio positions for investment funds that must be balanced with various indexes. In other words, buyers were forced in earlier in order to get to their required fund allocations before month end. Even when that appears to be the case, it can turn out to be tactical trading that ends up reversing course by the 3pm Treasury close. Different story today as it was all real need-based buying. With just under 2 more hours left to fill last-minute index-filling trades, everyone’s cards are being turned face-up, and all of them are “buy.”

MBS takes part in this to a good extent and this is where a supply/demand imbalance really shines and helps MBS keep up with the Treasury rally much better than they otherwise would be able to, even though the rally is primarily a function of month-end buying in Treasuries.

Couple conclusions:
First, apparently more than a few accounts saved their month-end house-keeping until after Jackson Hole. We can accept that and indeed, it’s one of the reasons we saw today as the first major opportunity to break out of the mostly sideways range since last Thursday. Second, we’re running into new, stronger resistance targets here and next week is no longer month-end (obviously). When that temporary demand exits, what’s left? Perhaps seeking out the next equilibrium ahead of the week’s key events with the ECB and NFP?

It all goes back to the “lead-off” analogy. This one has gotten convincing. The runner is either going to have to commit to moving to the next base or hope for a base-hit. We’re cautious about Tuesday for these reasons. Base-hits can’t come until the big-ticket events actually start happening. As far as our little base-runner having the resolve to continue in spite of that and in the absence of today’s month-end support, it FEELS like a tall order. Not sure if that just means we’ll pause sideways or bounce back lower, but the POSSIBILITY that today’s momentum isn’t guaranteed is worth considering at least.

For now, additional reprices for the better are a fair expectation, depending on the lender. Sadly, we may not see as many as we otherwise would considering the lateness in the day and the 3-day weekend ahead.

Article source: http://www.mortgagenewsdaily.com/mortgage_rates/blog/273173.aspx

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