MBS Pricing Snapshot

Fannie 3.0's are well into their highs of the day in short order on seemingly absent headline causality. Fannie 3.5's are close to breaking theirs. We know the move is shared with Treasuries which are sharply lower in yield relative to their excruciatingly narrow trading range. There really hasn't been a marked uptick in volume and the rally has all the characteristics of "snowball buying" even if only a small dose relatively.

Within the scope of the longer-term trends, this strength is already close to running out of steam, but if Fannie 3.0s manage to hold, say, 102-20, it's possible that we'd see a few of the more aggressive lenders reprice positively this afternoon. As with all "positive alerts," the important point is the absence of negative reprice risk, except inasmuch as some lenders have a history of "pipeline control" reprices. From a market perspective though, MBS are in their best shape of the day by far.

Well... today's 5 year auction had to be pretty bad if it was going to have much of an effect on MBS and indeed it was pretty bad. But while it's garnered the biggest volume and movement of the day in Treasuries, 10yr yields for instance, have been surprisingly resilient considering the ugly auction stats, holding fairly close to yesterday afternoon's high yields and not yet testing yesterday morning's highs.

As such, MBS haven't been overly panicked yet, with Fannie 3.0s and 3.5s holding inside the day's established ranges so far. We suspect that might change if we get a little snowball selling that happens to take 10yr yields over yesterday's highs, but for now, Treasuries are surprisingly resilient and MBS more so.

As for the auction stats themselves, the bid-to-cover came in at an eye-wateringly low 2.61 vs a 2.99 average for 2012 and a previous low of 2.85. The auction's yield award was 1.6bps higher than the 1pm when-issued.

Even though we said this morning that today's auction and data wouldn't matter, if you'd shown us the results ahead of time, we'd be expecting more weakness here than we're currently seeing. The determination to stay sideways and contained is impressive and as surprised as we are to say it, current weakness by no means justifies negative reprices. That said, lenders may be incrementally more sensitive to any weakness that does crop up in the next half hour.