MBS Pricing Snapshot

Now with volume dying way down, and with European bullishness no longer propping up the domestic risk-on trade, bond markets are picking up the few pieces that remain and are finding those to be mostly positive.

Fannie 3.0's are back up to 103-18 after hitting lows right on that long term trendline at 103-11 earlier today. 10yr yields matched last Friday's highs just over 1.59 and have since ebbed cautiously back in a friendlier direction.

It's tempting to hope for this correction to continue, and while that's a possibility, it really comes down to the will of whoever is left trading. 10's would first need to cross a technical no-mans-land between 1.563 and 1.558 before we could even consider such a thing and thus far, they've bounced before getting into that fight.

Even so, we're better off than we were, and the simple task of holding under 1.60 would be still be positive from a technical standpoint heading into the weekend. All that said, we're not sure how much more significance we'd read into trading levels for the rest of the day. 10'd biggest volume move was stopped out at 1.55-ish, with minor ancillary pops that stayed under 1.592.

So unless volume surges in a big way, we've basically seen what there is to see today, and can only just keep an eye on MBS for any potential supply/demand/liquidity related spikes. So far, so good in that regard as Fannie 3.0's have held 103-18 for the entire time this update was typed.

An inventory of what we know, by way of background:

1. Draghi essentially promised to buy peripheral debt last week. Peripheral spreads (namely Italian and Spanish) rallied. Core sovereigns (namely US and Germany) sold off. MBS followed.

2. The sell-off was a minor inconvenience at the end of last week, but the greater fear--as cynical as markets may have been about it--was that Draghi and the ECB would actually make good on the promise/threats

3. Draghi fell flat on his face yesterday in delivering on the threats, but instead, simply made additional promises that the ECB would find a way to get involved in buying peripheral debt (essentially the same stuff he said last week). Peripheral spreads sold off again, and core sovereigns rallied. Hurray...

4. In the intervening time, it's important to note that when Draghi met with the Bundesbank chief, although the German Central Bank was "not cool" with the ECB buying bonds directly or with the ESM getting a banking license so it could borrow directly from the ECB, they did in fact mention that the EFSF would be the preferable channel to conduct such bond-buying if it ever happens.

That brings us to today's big secret news--too abstruse for the mainstream media to pick up and cite as a bigger market mover than NFP and bordering on too abstruse for us to do a decent job of covering, but we'll do our best.

European banks this morning received requests from the EFSF to open repo lines, which has long been hypothesized as a way for the ECB to get around German opposition to direct bond-buying in the long end of the European periphery. We don't know exactly how this is going to play out yet, and neither do markets, but for now it is seen as an actual ACTION (as opposed to promises) that suggests a super-sized buyer of sovereign debt is stepping into the market.

This has led to major tightening in Euro zone peripheral spreads--basically "last Friday part 2: now with action!" And generally speaking, when Euro zone peripheral spreads are tightening, risk appetite is increasing, and domestic bond markets are selling off, just as they are today.

MBS are currently in line with their lowest levels of the week, matching yesterday's lows in Fannie 3.0's of 103-14. Similarly, 10yr yields are at 1.5768, essentially in line with yesterday's high of 1.577. 10's were as high as 1.5908 last week after Mario Draghi's London speech. Low volume is a factor in the price action as things have slowed down dramatically after the 11am European bond market close.

Most lenders' rate sheets came out in fairly conservative territory to begin with, but any additional losses would increase the risks of a negative reprice given that we're currently at these "line in the sand" levels.