"The secret to humor is surprise. Markets are balancing forward fundamentals against whatever tapebomb comes next from @realDonaldTrump. At this point we need to see proof that Donald is "Making America Great Again". Patience is thinning. Screens are already starting to disregard the influence of Twitter rants. That's what bothers me most. Ignoring headlines opens the door for more surprises. Pipeline hedgers hate surprises. Mortgages are dealing with disproportionately slower prepay speeds while trying to process the surface level shock of lower MIPs. HUD's announcement was heavily anticipated over the Summer. Expectations then dissipated as rates fell and the election drew nearer. By late Fall the street had basically written off lower MIPs. The sharp dip in G2/FNs yesterday illustrates the extent of astonishment. Product swap weakness was largely contained today but G2 rolls are still searching for reality as borrowers begin pushing back closings. New MIP is better than old MIP. The prospect of even fewer loans coming through the box in Feb seems to be pressuring back month levels. Get your lock extensions now! Lenders who can fund the day count will be enjoying elevated carry tied to clipping coupons. Hopefully pipeline hedges arb in the green too. After extending to max hedge ratios vs. mortgages in December, rates are attempting to establish a new trading range. 2.30 and 2.60 define that range for benchmark 10s. What happens in-between is fairly inconsequential. Rallying into 2.30 and/or selling up to 2.60% requires little profile/energy. 10s could even poke and prod at 2.25 with little motivation. Breaking through 2.60% would however require a real commitment. That would be a newsworthy event. 2.60% is a key duration ledge. It's the trigger for snowball selloff #4. After that comes 2.84 followed by 3.00 followed by infinity and beyond…
You basically gotta go “nose blind” as we test the trading range. Good luck keeping those cheeks clenched! Say a hedge cost serenity prayer and walk the line.
AQ
PS. No I don't think @realDonaldTrump is going to undo the MIP reduction [that was announced yesterday].
Adam Quinones
Head of Mortgages and ABS
Thomson Reuters
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