Jurassic Park: MBS Edition

Abstract

Today is already at risk of providing an example as an EU bond sell-off in the morning pulled longer term Treasury yields into negative territory. Even if bonds manage to rally back substantially, they'd still be nowhere close to challenging the prevailing uptrend, nor suggesting a shift away from oversold territory. Several have reiterated that, although rates are already in restrictive territory, they will be going higher and staying higher until inflation is convincingly lower and the economic data shows evidence of the Fed's restrictive policies. In the mortgage world, things continue to be even more of a mess than Treasuries. Coupon liquidity has been slow to come online, but we're finally seeing 5.0 coupons overtake 4.0s and 5.5 coupons just overtook 3.5s. If you're thinking "Hey... even after adjusting for the fact that rates can be 1.125% higher than MBS coupons, most of those are irrelevant to the rates I'm seeing," you're totally right. If you were solely trying to determine rate sheet pricing, you'd probably only be going as low as 5.5 coupons. More liquid coupons nonetheless serve as the foundation for arriving at prices of higher, less liquid coupons.