MBS Pricing Snapshot

The last 10yr Note auction on May 9th went off with a high yield of 1.855. So with 10's trading in the high 1.5's to low 1.6's y'day, there's understandably a bit of uncertainty as to how well tomorrow's auction will go at these levels. Yields rose somewhat abruptly shortly after the open this morning but BEFORE the 8:30am econ data, and without any discernible event-based motivation.

We could be seeing a few things here. On the one hand, there's the classic "auction concession" call whereby we'd expect to see some weakness heading into a round of supply. The fact that 10's mad a rather abrupt move without much connection to stocks (and the disconnection was evident in the overnight session as well after a much more connected day y'day) suggests that we can't rule the "concession contention" out.

Then there's the simple "volatility and technical" argument. Looking at the extremely-well-connected German Bunds and US Treasuries, there's a clear sense that yields bottomed out on 6/1 and have been in a very choppy pattern of consolidation since then with progressively higher lows and highs coming in y'day's overnight session very close to late May's stronger levels.

Bunds have definitely leaked higher at a faster pace than 10yr Treasuries overnight and to an even greater degree than an auction concession, this looks like it's pulling things higher at the moment. Bunds are at their highest yield since late May--a whopping 1.4% while domestic 10yr yields have been much slower to journey back to recent highs at 1.728, currently trying to establish support around 1.64.

In a technical sense though, it seems infinitely possible that something around 1.68 would be a MILD short term ceiling heading into tomorrow's supply--at least in a purely technical sense. 1.71% would be the next candidate for a trend-based supportive ceiling and we'd reassess if things got any weaker than that.

MBS, for their part are doing their best to fight off the ill effects of the Treasury slide, but that's about the best thing that can be said about them. Even though MBS are selling off to a lesser degree, Fannie 3.5's are still down another 8 ticks IN ADDITION to last night's roll, currently at 104-23. Fannie 3.0's are down 12 ticks at 102-02.

Tradeflows continue to arrive in big chunks with steady activity in between. The bias is decidedly negative this morning and for lack of a more complicated assessment, it looks like markets have agreed that yesterdays lowest-yield levels were some sort of tactical extreme for the "risk-off" trade, which in itself was a correction to the overnight "risk-on" trade of the Spanish bailout news.

On the bright side, if we're going to experience price losses in MBS, it's better to see it before rate sheets. If bond markets and MBS can hold their ground near current lows, it will make for a relatively risk-free remainder of the trading day in the sense that lenders are less likely to reprice negatively when the days first rate sheets are released shortly after hitting session lows.

* Import Prices -1.0, as expected
* export prices -0.4 vs -0.1 consensus
* petroleum prices -4.2 pct, most since May 2010

The price index for overall imports fell 1.0 percent in May, the largest one-month drop since the index declined 1.2 percent in June 2010. Prices for U.S. imports also decreased over the past 12 months, falling 0.3 percent, the first year-over-year decline for the index since import prices fell 5.6 percent between October 2008 and October 2009. The decrease over the May 2011-12 period was led by lower fuel prices which more than offset an increase in nonfuel prices.

Export prices fell 0.4 percent in May after increasing 2.0 percent over the first four months of 2012. The May decline was driven by lower prices for nonagricultural exports, which more than offset increasing agricultural prices. Overall export prices edged down 0.1 percent between May 2011 and May 2012, the first 12-month drop in the index since a 3.6 percent decrease for the year ended October 2009. The 12-month decline was led by lower agricultural prices.