Michigan Refinancing | MI Refinance

Who in the world would talk about SUPPORT (evidence for an intermediate FLOOR for prices) when 10yr yields are around 2% and MBS are near all time highs?  We would...  But not because we're sure these supportive developments are here for the long haul.  We'd just like to point them out to you because we think the current goings-on in 10yr yields and MBS prices are potentially a great way to look at intermediate to longer term lock/float strategy.

You may be well aware that bond markets are generall weaker today.  But take a look at the following chart of 10yr yields vs stocks.  As opposed to the extremely high correlations we've seen recently, 10's started to deviate a bit today and "hold their ground" versus rising stock prices.

As you can see, they'd been tracking pretty well but TSYs refused to follow stocks higher at the same pace today.  Your mind's eye might already be seeing something happening around 2.06, and so does ours.  The next chart puts that phenomenon into a bit of context. 

Sorry... there's a lot going on in that chart... here's a blow by blow

- 2 red lines show the converging (and COMPETING) trends that had been in play during August

- The bullish trend (the one that slopes DOWN) "won," and the bearish trend "lost"

- You can see the bearish trend being tested on a few occasions, but not definitively broken until early September

- In fact, we do think this is MORE ABOUT A "STAVING OFF" of that bearish trend!  Recall that had been the "counterattack" line.  In short, counterattack = thwarted (for now)

- That reintroduces the SIDEWAYS technical levels and those have clearly been present at 2.125 and 2.06. 

- Is it a coincidence that the biggest recent move down came after a break of 2.125? 

- The most important part to note is that after all the high volume testing of 2.06 as a yield floor, it has recently acted as a ceiling (and as the first chart noted, even if that's meant defying the stock lever). 

Long story short, it's clear that 2.06 means something.  Even if we're not willing to flat-out RELY on it for ongoing support, it makes sense to keep an eye on it as a potential indication that new technical "tests" are upon us.  You might think of a "test" as the line on the chart "is considering doing something different than recent patterns." 

This is particularly useful when we take a not-too-big of a leap and line up that 2.06 level with a similar inflection point seen in MBS, both in 3.5's and 4.0's.  Here are charts of both:

Bottom line, even if it's not a glorious promise of low rates forever, perhaps the current technical environment can serve as a good, broad warning sign of shifting trends.  After all, that's their job!

As the level of uncertainty has drastically increased in markets, we've seen a lot more connectivity between stock prices and bond yields.  Beyond that, we almost always see a high level of correlation between bond PRICES and MBS PRICES.  The following charts show how some of those correlations have been playing out recently.  The theme is that things tend to move in the same direction for Treasuries and MBS.  Fixed income YIELDS tend to move in the same direction as stocks.  Case in point, look at the past few days of S&P Futures vs 10yr Yields.

As you can see, not a perfectly linear relationship, but almost always moving up and down at the same time.  This is what we're talking about when we refer to "the stock lever."  Here's an even closer look at how it has been playing out so far today:

Once again, not always moving in lock-step with each other, but the overall correlation is clear. 

Also clear to the point of being a given is that MBS prices are almost always moving in the same direction as Treasury prices.  Indeed, this is one of the reasons we often discuss 10yr yields with respect to MBS (more importantly, they're a better guage of the overall bond market sentiment).  We've used the analogy in the past of "dog and master" walking down the street.  The master sets the pace and direction of the walk, but the dog can either tug at the leash or lag behind.  It's similar for MBS and TSYs.  Treasuries are generally going to go where they're going to go and MBS may go faster or slower, but almost always in the same direction.  The farther away MBS move relative to Treasuries, the tighter the metaphorical "leash" gets, and MBS begin to look either overvalued or like a bargain buy.

We definitely saw some interesting action with respect to Treasuries VS MBS today.  Earlier in the day, when panic and uncertainty were more of a factor, Treasuries were outperforming.  Then as 10yr yields stabilized and headed back toward 2.0%, MBS, rather than weaken in proportion to TSYs, merely held sort of steady.  The following chart uses Treasury futures in order to show PRICE vs PRICE.

Above, you can clearly see the yellow line gap out to the upside into the first part of September and then into this afternoon, you can see MBS just hold relatively steady as TSY prices came back down.  Any time TSY yields are rising or "risk-tolerance" is generally increasing, you're more likely to see MBS do this--hold their ground to against losses to a greater extent than Treasuries.  The long-term underlying phenomenon that makes this more likely these days is the overall "wideness" of spreads.  That means that Treasury yields are lower and lower versus MBS yields (MBS yields are something we don't talk about frequently because of the subjectivity and complexity inherent in their calculations).  Speaking of that subjectivity, we'll caveat the chart below to say that it expresses a line chart of MBS yields minus Treasury Yields (4.0 vs 10yr) and that those 4.0 yields are subjectively calculated based on Reuters prepayment speed assumptions.  As such, the actual spread levels may vary from other calculations, but any comparison of MBS to TSY yield over time should generally paint a similar picture.  The picture?  See for yourself...  Spreads are as wide as they've been since the Fed first started buying MBS in early 2009. 

Uncertain fate of GSE's?  Risk out of fashion?  A number of things are and could be contributing to the wideness of spreads here, but ultimately, market metrics are saying that MBS are currently perceived as being about as risky as they were at their best levels of 2008.  Given the changes in underwriting and lenders' more stringent application of guidelines since then, would you agree this should be the case?

After this morning's economically weak Employment Situation Report, 10yr yields broke out of a consolidating pattern of lower highs and higher lows.  10's are currently hovering around 2.06 near all time closing lows.  Here's a bird's eye view of the breakout:

And with respect to the shorter term examination of that same triangle that we posted on Wednesday, here's a closer look where you can see how resistance is broken and how the line moves quickly lower after the breakout:

MBS had an awful time keeping pace with the initial leg of the rally in early August, and althought they aren't gaining as aggressively as TSYs at the moment, they are similarly near their all time best levels, both in the 4.0:

and in 3.5's

There are still almost no 3.5's being originated in the TBA market and the rates on rate sheets that could ultimately end up in 3.5 MBS pools are still looking more challenging than 4.0's.  Here's a shorter term view of 4's.  They look "rally exhausted" :

Whether or not MBS are rally-exhausted or not doesn't really matter as much to rate sheets as it might seem.  Actually, we don't really want MBS to rally further here as it would be better for rate sheets for MBS to merely hold steady.  But that means benchmarks would also need to be holding relatively steady and would likely require a steady drip of economically negative headlines and reports to achieve such a thing.  Here's a look at the chart of the economic data that did that trick today: Non-Farm Payrolls.  Note how the variations in NFP prints in the past still tend to follow the same sloping trend direction, and how they've done that again this time (especially if you discount the verizon effect, in which case, they'd hit the line perfectly).