MBS Live Morning: READ THIS!!! New Rule...

Abstract

REQUIRED READING for anyone who doesn't fully understand why the 4.5 UMBS coupon is far better to follow than the 5.0 intraday. Today there's an urgent need to discuss an often confusing topic when it comes to the bond market's relationship with mortgage rates: which MBS coupon should you be watching? In the past, for the most part, that's been easy for a loan originator to determine based on the rates being quoted. Prevailing rates consequently suggest MBS coupons of 5.0 and 5.5, but these are absolutely NOT the coupons that should be followed for the purpose of identifying intraday trends and risks. You may be wondering, "If a 5.5 coupon is the best match for what I'm seeing on my rate sheets, wouldn't it be a no-brainer to watch 5.5s?" Your logic is sound, but there's a big problem right now: compared to lower coupons, 5.5s are effectively nonexistent. There's no depth from previous trades and new day-to-day volume/ That chart is a bit messy because it follows each tick of data. The following chart uses moving averages of the same data to smooth things out quite a bit: Predicting reprices in this environment is far more challenging because all liquid coupons are priced below par. Rate sheet generation complexity only increases when you look at coupons priced above par.