MBS Pricing Snapshot

MBS aren't back down to their lowest levels of the day, nor are Treasury yields back to their highs, but both are making menacing gestures in those directions as stocks continue to rally off their 2pm lows. Fannie 3.0s are down 8 ticks on the day at 104-03, 5 ticks off their afternoon highs and 10yr yields have moved up a mere 1bp from their best levels of the afternoon.

As can be the case at times, the actual change in prices between any given lender's most recent rate sheet and the current time doesn't justify negative reprices. That said, any continuation of this selling trend at the end of the day can still cause some negative reprice risk.

This isn't a high probability scenario at current levels, especially if this proves to be a passing bit of late-day weakness, but prices would only need to look like they were headed for a retest of morning lows before several of the quicker-to-reprice lenders would be considering it. Some may be fairly close at the moment if MBS don't bounce back convincingly, and quickly. Stock markets seem to be giving a fair bit of guidance for bond markets this afternoon. If that rally into the equities close continues, so too may our sell-off.

One silver lining to a big nasty sell-off in the morning is that it sets the stage for positive reprices in the event of afternoon strength. Afternoon strength has indeed continued to prevail since the 10yr TIPS auction, but not because of it. Rather, we're seeing a combination of factors including tradeflow considerations specific to bond markets as well as some measure of the stock lever in play. S&Ps are back to their opening levels after gaining nearly 10 points before the noon hour.

Treasuries have been somewhat interested in following the stock selling and MBS are generally keeping good pace with the broader-scale "risk-off" swing. We just got our first positive reprice as a result, and with Fannie 3.0s currently down only 4 ticks on the day at 104-08 (intraday lows at 104-00), additional positive reprices aren't out of the question.

The 10yr TIPS auction at 1pm stuck to its normal routine of having relatively little impact on Treasuries and MBS. The weakest levels of the morning were seen around the 11am hour and both have rallied back in minor amounts since then.

The net effect is a Fannie 3.0 that's still down 7 ticks on the day but 5 ticks off the weakest levels of the day. After rallying at the open, stocks have ebbed back in line with their best pre-market levels. We don't want to say that things are starting to look more supportive for bond markets, because we don't want to "jinx" the prospects for any further bounce back.

Whether or not this "less-badness" has any lenders thinking about positive reprices is much less certain. It's conceivable, but unimportant. The more important phenomenon is the absence (or at least the "abatement") of negative reprice risk. If the stability and moderate bounce back is grounds for a lender or two to toss a few bps our way, so much the better, but at least we're putting in a few hours here without exacerbating previous weakness.

Both MBS and Treasuries moved to weaker territory with the stock market open. Volume has been big as longs have been liquidated in the Treasury complex. 10yr yields are currently testing a breakout of their intermediate term downtrend which runs through the mid 1.86's today. MBS are hovering around a key longer-term support level at 104-02 (update: breaking to 104-00 as I write!).

Most of the incremental weakness had already arrived before lenders released rate sheets, but the environment remains skewed toward weakness. Any additional weakness could begin forming snowballs of more serious sizes for bond markets. We'd stay more defensive than usual when it comes to number of ticks lost between now and rate sheet print times. Trends are ugly.