Directional rallies in MBS and TSYs are making it a difficult to see the forest from inside the trees. While numerous short term pivot points pop up, and even provide some useful guidance, they remain microscopic with respect to the bigger picture. Today, that “forest and trees” scenario played out in its usual fashion….
As we often discuss, yesterday’s
resistance can become today’s support (aka: pivot or inflection points).
Well…the mid 3.34’s clearly emerged as a resistance level yesterday in benchmark 10s and then re-emerged today as a support level following a sloppy 7yr TSY auction, which sent yields higher into the afternoon hours. Yields have since moderated back down toward recent lows. Thank you tactical 3.34% pivot!
10s finding support at 3.34 served to calm reprice risk and allowed FNCL 4.5s to remain above the 102-20 mark. FNCL 4.5s rallied back +10 ticks on the day to 102-24 after getting as low as
102-19. 102-24 is another key inflection point. Keep reading….
All of these movements are only part of the bigger, broader picture. The MBS range is running out of room as can be seen in the chart below. There’s 102-24! We’re not trying to tell you FNCL 4.5s can’t breakout of the range though, just that there’s clear resistance from a technical perspective right over our head.
With that being the case, we can move to an even broader picture to see how the undercurrents in benchmarks are working with (and against) the resistance seen in MBS above. The chart below shows, barring the Japanese crisis induced Flight-To-Safety, in 2011, 10yr yields have resisted a sustained break through current levels….consistently!
Plain and Simple: Both benchmark 10s and FNCL 4.5s are running out of room to rally. Moving meaningfully through the resistance levels outlined above will be
tough to do as it would require a confirmed shift in the market’s economic outlooks. This is a requirement if we’re to see a sustained shift lower
in Best-Execution mortgage rates. We described that barrier in more detail HERE when we said….
“Lenders have moved the Best Execution 30-year fixed note rate as low as they possibly can without drastically altering their pipeline hedging strategies. This is a factor of what production mortgage-backed security coupon is most liquid in the secondary mortgage market. On conventional loans, the 4.50 percent MBS coupon is the hedging vehicle of choice for lock desks. Home loans with note rates between 4.875 and 5.25% are generally used to fill 4.50 percent MBS coupon trades. Until MBS investors demonstrate sustainable demand for 4.00 percent 30-year fixed MBS coupons, lenders will not find it economically efficient to quote 4.75 percent note rates without expensive permanent buydown costs. From that perspective, if you are floating a conventional home loan interest rate, you should not be expecting further improvements to your actual rate in the short term. If the bond market recovery rally continues, closing costs will improve, but on the whole, it will take a sustained move higher in 4.00 percent MBS coupon prices for Best Execution to dip below 4.875 percent.”
Check out our color on loan pricing today to see how it all relates….
“C30 loan pricing is 26.1bps better on average today at the five major
lenders. This leaves C30 Best Execution in limbo as the primary market
is competitive enough to force some desks into trimming margins to make
4.75% attractive outright, but the buydown is still expensive.
Anything to get deals in the door! The back month FNCL 4.5, the MBS
coupon lenders base pricing on, is +8/32 at 12-11. This 8 tick price
gain matches up perfectly with a 26.1bp improvement in rate sheets, so
unless your pricing looks a little light, it’s gonna take another 6-8
tick rally in MBS before reprices for the better are awarded”