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MBS Day Ahead: Let's Talk About Porridge

Posted To: MBS Commentary

I don't know much about porridge. I'm not even sure I've ever eaten it. I do know one thing about it though: the temperature has to be "just right" from what I've heard. Markets--especially bond markets--are very much like Goldilocks when they're responding to a major shock and quickly adjusting to a new reality. The initial reaction to a a shock often sees a quick investigation of the hottest bowl of porridge. That is to say, the world is ending and people can't buy bonds fast enough. Yields fall precipitously, and MBS prices rise as much as they can in the context of their convexity-related limitations. Then a new reality sets in that places a premium on liquidity and cash positions. It's exacerbated by a technical correction leading back from the just...(read more)