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  • Writer's pictureWWH

MBS Highway Daily Updates 04/24/2023

Current position: Carefully Floating

Stocks and Mortgage Bonds are both higher to start the week.

Next Week's LLPA Changes

The new loan level price adjustments are very complicated and frustrating. You may have many clients that are shopping for homes, but due to no fault of their own, it will now end up costing them more. We completely feel for you. It's extremely difficult to explain this to a customer.

While this is something we don't agree with, as it goes against every common sense thing from a risk profile standpoint, you will still be in a better position if you are a customer with a higher credit score and higher down payment vs. a lower credit score and lower down payment, but the difference between the two is much closer.

The way they decided to do this is to reduce the cost for those at greater risk, and to subsidize it, they are charging more to those at lower risk. To charge more to those who have been doing a good job is not the way to go about it. It also assumes that just because someone has a better credit score, they don't have other challenges. We believe this to be a mistake and ill-conceived.

Additionally, it is still a better deal to do an FHA in most cases. When you explain this to your customers, don't feel bad; it's across the board, and it's not your fault.

Short Squeeze Potential on a 10-year

One of the ways you can bet on a stock going down is to go "short". If the stock moves higher, you can continue to lose money indefinitely, as the stock can continue to go up. But if the stock moves lower, you make money and continue to do so until it reaches zero. You can do something similar in the bond market with the 10-year, where you can go short 10-year Treasuries, but this would be a bet that the yield will move higher, as the price and yield of 10-year Treasuries are inversely correlated.

That means that if yields move higher, the price of 10-year Treasury bonds moves lower, and you make money. If yields start moving lower, you will lose money. In any case, in order to cover your short and exit the trade, you have to purchase the underlying security.

We bring this up because, in the current market, the number of shorts, or bets that yields will move higher, is at a record high. The last time we saw something even close (hat tip to David Rosenberg) was in 2018. As yield started to move lower, people were forced to cover their short positions or buy 10 years, which caused a short squeeze. Yields moved 60 bp lower. We could see something similar if we see some bond-friendly news in the coming weeks.

Week Ahead

Tuesday: Case-Shiller HPI, FHFA HPI, New Home Sales

Wednesday: Mortgage Apps, Durable Goods Orders

Thursday: Q1 GDP, Initial Jobless Claims, Pending Home Sales

Friday: Personal Consumption Expenditures (PCE), Employment Cost Index

Technical Analysis

Mortgage bonds are battling with their 50-day moving average and thus far have been able to remain above it. The 10-year is testing support at its 200-day moving average and, after breaking beneath it earlier, has moved back above it following the stronger than anticipated manufacturing report. The stochastics are looking favorable, and if we see some more positive movement in MBS and yields continue to decline, we could have momentum working in our favor. Begin the day carefully floating.


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