Across the Curve

Swaps MBS and VOL

Swap spreads gapped wider today across the yield curve. Once again it is very very, ugly.

One trader in describing the back drop made several cogent points.

The mortgage market, according to this observer, is as negatively convex as it has been anytime since 2002/2003.  Two weeks ago the market was short above the market payors (in a sense) and now the market is essentially short the ATM.

Those positions generate their own volatility as very small movements in the underlying mortgage elicits significant hedging activity.

Much of that hedging transpired in the swap market today. Two year swap spreads are 6 basis points wider at 46 1/4. Three year spreads are 7 1/4 basis points wider at 57 1/4. Five year spreads are 7 basis points wider at 49 1/4. Seven year spreads are 9 basis points wider at 29 1/2. Ten year spreads are 9 3/4 basis points wider at 29 . Thirty year spreads are 13 3/4 basis points wider at NEGATIVE 17 3/4.

There was active paying and active buying protection via payor swaptions.

Mortgages had mixed results with a division by coupon. The 5 1/2s bested swaps by 5 ticks and 6s outperformed by 10 ticks.

It was decidedly less festive in the low coupons with 4s underperforming by 11 ticks and 4 1/2s lagging by 6 ticks.

The 3month 10 year ATM swapion combo is trading at 653 basis points.