MBS Pricing Snapshot

It's been a weird, choppy, and inconsistent trading day. Even now--as we're about to comment on low MBS prices and increased reprice risk--there's STILL a chance that benchmark 10's will see a big ceiling bounce around 2.06 that ultimately helps MBS put in a similar floor bounce off 103-03 in Fannie 3.5's. In fact, we might even wait to see how that materializes before any sort of panic lock.

That said, current price levels are such that lenders would be justified in negative reprices. Balance that with the fact that rate sheets were generally worse yesterday than the day-over-day change in MBS prices (post-roll) would have indicated. So there may be some wiggle room.

So is this a reprice alert? We're not sure... If so, it's an equivocal one. Fannie 3.5's are off about 5 ticks from rate sheet time, which is historically sufficient for negative reprices from some lenders, but because of the choppiness of the trading day combined with the conservative rate sheets yesterday and as-yet unbroken ceiling of support in 10's (or floor in MBS prices around 103-03) there's enough justification to stick around and fight as well. Bottom line, reprice risk is increased with the latest move down, but not to panic-inducing levels yet. We'll let you know if things change in either direction.

MBS are hitting break-even levels on the day and 10yr yields have fallen from 2.06's to 2.04's after a fairly tepid 30yr Bond Auction. Once again, the statistics were just about average. In fact, the auction was sort of a dud when compared to other Re-Openings.

The bid-to-cover was was stronger than the recent average of all 30yr auctions but weaker than the recent average of reopenings. Indirect participation fell within the same equivocal territory. Yield was right on the screws with 1pm expectations (as measured by "when-issued" trading). Given the fact that 30's rose about 5bps in yield from this morning's lows to discount the auction, the results leave much to be desired.

That's probably why you aren't seeing a more resoundingly bullish response. But the fact that the auction cycle is over for the week, and that no major drama came out of it, is cause enough for bond markets to moderate their previous selling trend to some extent.

Still... the slight moderation hasn't brought 10yr yields back through an approximate pivot point in the low 2.04's, which is fairly negative from a technical standpoint. Reason being: there were high yields yesterday and this morning between 2.04 and 2.045. We broke through those earlier and came back to bounce on them one time as a floor and now again following the auction. That's the sort of "pivot point" behavior that left-unchecked and un-tested, bodes ill for bond markets chances to rally back to stronger levels.

MBS are down only 1 tick on the day now at 103-06, but the jury is still out on the rest of the day's momentum. We'd like to see that pivot point in 10's broken before getting more bullish and a small amount of reprice risk remains at current levels.

We wouldn't believe it if we didn't see it with our own eyes, but it does indeed appear that bond markets paused selling momentum earlier for a bomb scare at World Financial Center bldg 2 in NYC, and now are right back to their selling ways after the package was determined to contain a toy grenade.

MBS and Treasury prices hit fresh lows just now and reprice risk is elevated. Fannie 3.5's are down 5 ticks on the day now at 103-02 and 10yr yields are moving into an important support zone in the mid 2.06's. The weakness may also be partly attributable to a concession being built in for the 30yr Bond auction in about half an hour. A strong result there could help bond markets hold their ground.

MBS are hitting their lows of the day and 10yr yields are near their highs of the week. The recent moves can be attributed to several potential developments:

1. Positioning following the Fed's Twist buying that just concluded at 11am. Often causes choppiness and volume spikes. This one has been more negative for bond markets than most.

2. Reaction to large volume futures trades in favor of shorter term maturities.

3. positioning ahead of today's 30yr auction. Normally, there'd be a bit of a discount, but when big futures trades indicate steepening bets in the morning, that positioning can get even more pronounced.

4. Cap this all off with the fact that many were targeting the mid to low 1.9's in 10yr yields as the range where short-covering would be exhausted and many were expected to "re-short" the market.

All that having been said, it's not the end of the world yet, although we're at the weakest recent levels. 2.06-2.07 would be more nerve-wracking support for 10yr yields and MBS should hold up better by comparison anyway. Even so, weakest levels of the day after rate sheets mean negative reprice risk is upon us.