Which MBS Coupon Now?
Abstract
In mortgage-specific developments, this week's rate spike is raising questions about the UMBS coupon that originators should be watching when it comes to mortgage rate implications. That question raises its own question: do you want to know which coupon is most relevant to outright pricing at any given moment, or do you want to know which coupon's movement will tell you the most about how rates may change intraday? UMBS coupons can accommodate rates between 0.25 and 1.125% higher than that coupon. A 5.0 coupon can contain note rates up to 6.125%, but just because you're quoting rates in the 6.25-7% range depending on the scenario doesn't mean you should be following 5.5 coupons. Even 5.0 coupons are not the best choice just yet. At any given moment, the price of a 5.5 coupon is either perfectly in line with what it should be, or it's about half a point too low. The following chart shows a liquidity breakdown from 3.5 to 5.5 coupons. Clearly, 3.5 and 4.0 coupons are even more liquid than 4.5s over the past few days, but that liquidity is more a function of market depth whereas there are more trades happening in 4.5s and 5.0s..