MBS Pricing Snapshot

It greatly depends on what time of morning the lender in question released initial rate sheets, but MBS have already deteriorated enough for, and in a pattern consistent with the possibilities of early negative reprices. Fannie 3.0's hit 1-month+ lows of 103-07 moments ago and 10yr yields continue to snowball higher, hitting 1.6353 into the the conclusion of Fed Twist Buying.

The Twist buying results can sometimes have a slightly positive or negative push on trading levels. Naturally, if that push is negative this morning, it would mean increasing reprice risk. 103-07 is actually RIGHT ON the line of a long term pivot with the highs from early June. So it's the first and best line in the sane for further risk. Every tick down from there would increase reprice risk, with firm support likely at 103-00 to 103-02.

So far we're holding steady in the few minutes since twist buying ended, and Fannie 3.0's have moved up to 103-09, and 10yr yields down to 1.6318.

Although MBS are currently handing on to similar levels seen on 7/27/12, they're much weaker this morning as are broader bond markets. The scary possibility of the "V-Shaped Bounce" for bond markets mentioned in The Day Ahead is playing out forcefully so far this morning as volume ramps up in 10's and yields rise to meet a consistent and linear uptrend for the month.

The overnight session began decently enough for bond markets and Treasuries managed to hold relatively flat during Asian hours. But the dominoes started falling in European hours and we're witnessing continuation of that phenomenon into the domestic session.

There are a number of factors that can be cited as potential conspirators behind the weakness, but it's clear that we're not dealing with a solitary, major, market-moving event, but rather a general collection of fundamental and technical data that simply reached a sort of self-sustaining mass. We would note, however, that one of the pieces of overnight news that seems to have marketed the turning point for equities futures and Treasuries is the successful vote of confidence by the lower house of Italy's parliament on a package of spending cuts. That happened shortly after 3am , the same time that stocks turned around and Treasury yields broke from their previously sideways pattern to march higher.

10yr yields began the domestic session still clinging to the idea of a 1.60 ceiling of support, but broke into the 1.6's in short order and currently trade at 1.616. Fannie 3.0's are down 10 ticks at 103-10 and S&P futures are up roughly 6pts from 4pm levels.

There are no significant data or events on the domestic calendar today, although the 3yr Treasury Auction at 1pm used to be significant. We'll note that it exists, along with Consumer Credit at 3pm, but neither are likely to supersede the impact already seen from simple snowball selling and perhaps some early preparation for tomorrow's 10yr Auction.

Just so that we're prepared for whatever weakness may lie ahead, we've recently mentioned a 1.67 pivot in 10yr yields (and frequently discussed it in the past). 10's could just as easily shoot up to regroup at 1.67 as the could bounce stronger today. With such a preponderance of "green days" in the past several months, a week of mostly "red days" may feel like something that shouldn't exist back to back. And while we would imagine that something like 1.67% would get a lot of attention from interested buyers, we wouldn't hastily rule out the possibility that's where we could be headed. That said, unless things get really out of hand, that seems like it would be too much of a move for today's trading session to muster.

The point is to not simply EXPECT that tomorrow will necessarily be better simply because most "tomorrows" have been better in the past several months. In other words, keep a neutral outlook, possibly slightly defensive until we're moving sideways again or trending back in a positive direction. Right now, we're trending in a negative direction since late July.

A senior Federal Reserve official said Monday that the employment data released last week had reinforced his view that the Fed must act to increase economic growth.

Eric S. Rosengren, president of the Federal Reserve Bank of Boston, said that the Fed should again expand its holdings of mortgage bonds and Treasury securities, and that the purchases should steadily continue until the Fed was satisfied with the health of the economy.

“You continue to do it until it’s clear that you’re no longer treading water,” Mr. Rosengren said in an interview. “You continue to do it until you have documented evidence that you’re getting growth in income and the unemployment rate consistent with your economic goals.”

German politicians from across the spectrum have reacted furiously to warnings by Italy’s Mario Monti that Bundestag control over EU debt policies threatens to bring about the “disintegration” of the European project.

“We must make it clear to Mr Monti that we Germans will not shut down our democracy to pay Italian debts,” said Alexander Dobrindt, secretary-general of Bavaria’s Social Christians (CSU).

Bundestag president Norbert Lammert said parliament’s integrity cannot be subordinated to the ups and downs of the markets. Free Democrat (FDP) leaders said Italy’s unelected prime minister is playing with political fire by trying to circumvent democratic legitimacy.

The dispute comes as relations between Germany and Italy touch the lowest ebb since the Second World War, with Il Giornale publishing a front-page picture of Chancellor Angela Merkel under the headline “Fourth Reich”.