MBS Pricing Snapshot

Even among market participants, we don't see a clear consensus on how to interpret today's auction apart from the obvious 0.5bps "stop-through" (meaning the awarded yield of the auction was slightly lower than markets had been expecting). Beyond that, we've seen and heard a lot of differing takes on how today's 2.90 bid-to-cover fares vs history as well as the % of the auction totals accounted for by the various account types.

This leads us to reiterate that which has already been said. Refundings and reopenings are distinctly different. a 2.90 bid-to-cover isn't a big miss when considered vs recent refundings (which is what we had today). Additionally, the % of the total taken down by the dealer community is HIGHER than recent averages for refundings despite being lower than the recent reopenings.

That relatively high % taken by dealers helps account for some of the immediate (but very minimal) knee-jerk higher in yield following the auction. The street got more than it wanted, so 10's were on sale for the first few minutes after the auction (on sale = lower prices/higher yields).

With that having been worked through, we see 10's back into the 1.83's, but still susceptible to motivations from the 'risk-o-sphere'-- that is to say, the general "risk on" vs "risk off" mentality that looks to be mostly governed by Euro-drama at the moment.

To that end, we just got a wire confirming that the EFSF is cutting Greece a scheduled check for €5.2 bln despite recent elections creating the possibility that Greece could vote itself out of the austerity measures required to receive said funds (read that one twice if you have to... It wasn't fun to write either).

The net effect of this news is bond-market-negative. We're seeing 1.83's become 1.84's as we type and MBS moved down 2 ticks on the day to 104-03 before quickly bouncing back 1 tick into the green at 104-05. Too soon to know if the selling trend will continue through the end of the day, but things are looking weaker at the moment. Bond markets' fate seems at least loosely linked to equities and the broader concept of "risk."

Negative reprices are not out of the question among a very small group of "early crowd lenders" but we'd continue to look more for 104-03 and falling before jumping on that band-wagon with both feet.

When Treasury takes the lid off a fresh jar of 10yr Notes, that's a refunding. When Treasury opens the jar two more times to let bidders take what they want, those are re-openings. Today's auction is the "fresh jar" refunding variety, and they historically garner lower average bid-to-cover ratios.

Some might even refer to a bid-to-cover at 3.00 in today's auction as "below average," when in fact, it would be above average for refundings. More specifically, refindings have averaged 2.98 in that arena while reopenings have averaged 3.29. Over the last 4 auctions total (without regard to refunding vs reopening), the average has been 3.09, very similar to the average of all auction since the August FOMC Announcement (3.10).

10yr when-issued (WI) yields are currently trading around 1.853, which would make today's auction the lowest yielding in modern economic history. If the "high yield" from the auction is lower than that WI yield (marked at 1pm), this will be noted as a "stop through," or as a "tail" if it's higher than 1pm WI yields. Stop-throughs and tails have been fairly evenly distributed among refundings and reopenings, so there's no clear expectation for things to go either way in that regard, though there is the natural concern about "lowest yield in history." In the past example of a historically low-yielding auction, a 1.91% when-issued yield didn't deter markets from stopping through with a 1.90% high yield at auction.

Today's ebbs and flows are clearly linked to the broad notion of "risk," particularly as it relates to Europe. Case in point, when a Greek political leader from the far right was out around 10:30am New York time saying that there would not be enough seats for the "anti-bailout" government that far left leader Tsipras set out to create today. At that same time, risk markets came roaring back, relatively speaking, with S&P futures up almost 15 points since then. 10yr yields are happy to follow with the 10yr Note Auction coming up at 1pm. MBS continue to be merely along for the ride--a bumpy one at that.

We were already expecting to see some last minute efforts to build in a concession ahead of the auction and the stock rally makes it that much easier to do. 10's are up into the 1.82's at the moment and may pause to reflect at the 1.83-ish technical level. If you'd asked us yesterday, we'd have thought 1.83% would be too low a yield for a pre-auction concession, but in light of this morning's run into the high 1.7's, we're less certain of that. On the conservative side, we can't rule out further weakness given that European markets are closing and that could already be playing a part in robbing domestic bond prices of some of their buoyancy.

MBS, for their part, are just trying to minimize the ugliness, currently holding 1 tick in the green, but at their weakest levels of the day. Negative reprices? Not super likely with a 4 tick drop from 104-08 to 104-04. Even then, lenders' sheets have been increasingly disconnected from MBS into this rally anyway. Given the widening degree of separation between MBS and Treasuries combined with the widening degree of separation between MBS and rate sheets, a brief downtick on a day like today isn't much cause for panic. Just remember, not every lender in the world may see it as rationally as that. 10yr auction is the next big mover. 104-02 and falling would be an easier situation to be panicked about.