Sell off Leads to Worse Pricing

The unfortunate truth about all markets investors invest in is what goes up will eventually come down, and yesterdays sell off was an example of just that. There were many reason this took place, which we'll discuss today - then we'll talk about our market moving forward.

Considering the mortgage backed securities market broke record highs when it closed last Wednesday, and considering the recent two month trend we've enjoyed has raised the price of mortgage backed securities a full three and a half points - we were due for a sell off. More importantly we were faced with settlement which is when this months coupon rolls into the next months coupon - currently a future. Futures always trading lower than the current market coupon - consequently when roll occurs our market immediately falls to the future coupon price and begins trading. It is no coincidence this sell off occurred right before settlement, which is evidenced by the large drop off at the end of trading. Additionally the stock market managed to put on a good performance rallying despite a late sell off, and in international markets the Euro has begun gaining on the dollar, which may or may not have had something to do this the treasury yield rising to highs we have not seen in the last week.

Put all these things together and it not only makes for a great jambalaya recipe, but a terrible day in the mortgage backed securities market. But as I said, a sell off at the high point in the market is not uncommon. After all isn't that what investors are trying to accomplish, buying low and selling high? Yes I know it sucks for us, those looking to take advantage of the offered rates, but please be aware, not all is lost despite pricing being slightly higher today.

Moving forward. I am expecting our market to rebound and begin its recovery. We may see some gains today, come Monday the support for our market should re-establish itself at which time investors will return to mortgage backed securities.

As you can see on this graph our market is posting small gains this morning. I am not anticipating heavy trading but this is the support we are looking for.

Lenders will be slow to reprice this afternoon, if you plan on floating you're probably going to want to hang tight through the weekend and wait for Mondays opening.