The word “roll” has a few meanings around here. For those who participate in MBS markets at a higher level, “dollar rolls” are actual tradeable positions that involve selling one delivery month of MBS to buy a future delivery month (or vice versa). Colloquially, however, we also use the term simply to refer to the monthly settlement process in MBS. Reason being: since the price of a dollar roll is the same as the gap between this month’s MBS and the next, it gives us a quick way to refer to the drop in prices that shows up on charts when we shift our point of view to a new delivery month.
Confused yet? Don’t be. This is as simple as the concept of “time value of money.” For instance, let’s say I have 2 and only 2 MBS coupons to sell you and you have to decide which one you want, as an investor. They both pay 2.0%. They’re identical in every way except you’ll get your first interest payment one month earlier on one of them. Which one would you pay more for?
You’d obviously pay more for the one that paid you back sooner–all other things being equal. Granted, there are few additional considerations that can go into the decision, but it’s mainly about the timing of repayment.
Once you understand that, all that’s left in mastering an understanding of price movement on roll day is to consider that yesterday’s MBS prices were for June coupons and today’s are for July coupons. June coupon trading ended yesterday. July coupons were ALWAYS trading lower in price (due to time value of money). If today’s chart was simply July vs July, you would not see as big of a drop.
For what it’s worth, the drop is a bit bigger than it typically would be because June coupons got squeezed higher more than the rest of the MBS market yesterday. We can see this by looking at the two delivery positions separately. The orange lines correspond to the prices seen on MBS Live (the green lines are for “back month” pricing, which is of no concern for our target audience. If it’s of concern to you, you should have Eikon if you don’t already).
We have the MBS Live dashboard set to account for the roll in displaying day-over-day price change. In other words, if the price change is POSITIVE (green) but the line on the chart looks lower than yesterday, it’s because the price change is based on yesterday’s July coupon closing price whereas the line on the chart is for June coupon prices.
When it comes to today’s price pressures and motivations, the main event is the Fed announcement at 2pm ET and the press conference at 2:30pm ET. The Fed has been a fairly open book in terms of policy transparency, but there’s some question as to whether or not they’ll solidify their emergency bond buying plans by instituting official QE4. To be fair, that’s basically what’s happening now, but technically the bond buying has been on an “emergency” basis. Because it might not be any different from existing bond buying efforts, it’s hard to say how the market might react to the official announcement, but one would assume the certainty with respect to buying amounts and time frames would be worth something to bonds.
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
101-22 : +0-04
0.8020 : -0.0270
|Pricing as of 6/10/20 9:06AMEST|
Tomorrow’s Economic Calendar