MBS Pricing Snapshot

Fannie 3.5 and 4.0 MBS both show moderately-sized moves lower just after 3pm. These are unlikely to create any material reprice risk unless accompanied by a more concerted move lower in broader bond markets.

Such a thing looks unlikely at the moment as broader bond markets are not only rattling around in a sideways range since the 10yr auction, but are utterly exhausted after what has been their busiest day of the week by far.

Quote activity is driving the price changes (sellers adjusting prices at which they'd sell and buyers at which they'd buy), and actual executed trades are much less prevalent now compared to earlier in the day.

Bottom lines: the 3 tick loss in Fannie 4.0s from 3pm isn't necessarily "real," and thus not grounds for an alert.

The first move following the 10yr auction is strongly positive as yields came in at 2.946 vs a 2.97 expectation. The bid-to-cover was bigger than we've seen since March 13th, and completely crushed the recent average in the mid 2.5's. (2.86 today).

10's are already down under 2.94 and Fannie 4.0s are back up to 102-11. Negative reprice risk is very much on hold. Positive reprice risk takes over soon if this continues.

Verizon just completed an Auction and the US Treasury is about to complete theirs. Both are impacting volatility in rates markets.

Verizon's initial price guidance on it's record bond offering hinted at very high rates of return for would-be investors. The deal was grossly oversubscribed (meaning a lot more people wanted to buy those bonds than Verizon was likely to sell, but the ultimate amount was a bit of a moving target).

Investors bid in a similar fashion to Treasury auctions and Verizon starts with the best offers and works lower in yield from there until it has as much money as it wants to have. Investors were expecting the actual payout to be a bit lower than the initial price guidance.

It wasn't. The final deal priced at the same levels Verizon initially announced. Any time you have billions of dollars transacting in the corporate bond market, there is a complex and interconnected series of buying and selling across multiple financial instruments.

Some of the biggest instances of this can be where the corporation issuing the bonds sell Treasuries in order to insulate themselves from rising rates between now and the time they begin paying out on the deal. Investors can also sell Treasuries (or MBS) to "make room" to buy the new Verizon bonds if their offers are accepted at the Verizon Auction.

There's no way to know exactly who is hedging what, but the volatility is apparent. 10's shot higher as the deal pricing came out and though they've returned to previous levels, the sense of pressure remains. MBS are another tick lower from the last check-in as well (Fannie 4.0s at 104-08), keeping reprice risk on the table.

Compounding all this is the fact that investors are simultaneously bidding on new supply of 10yr Treasury Notes at today's auction (results at 1:01:30pm). Some of the weakness we're currently seeing may owe itself to those needs. If an analogy helps, imagine you like fruit and that you have a certain amount of money + or - a bit of wiggle room to buy fruit for the week. You know there will be three trucks coming on Tue-Thu with apples. you know other fruit-lovers will be there to buy apples, and that the price of the apples will be determined by that demand.

The price of apples also has a current "going rate." That going rate is determined by how you and other fruit-lovers trade apples with each other. Given that you know these three big trucks are coming with a lot of apples, and given that you know you only have so many friends that are fruit lovers, maybe you and your friends will trade the price of apples a bit lower ahead of time so that you're more easily able to clean out the trucks... (if that didn't make sense, re-read it until it's crystal clear because that's exactly how an auction concession works).

Now imagine Verizon calls on Monday and says they're bringing a huge truck load of oranges that they promise taste twice as good as those apples. Of course, you and your fruit-loving friends dig oranges as well, and some of you will definitely buy some. The amount of chaos that such a "surprise deliver of super oranges in the middle of apple week" could create is roughly similar to the chaos created by the confluence of Verizon's deal and Treasury auction supply, ALL a week before a potentially epic announcement by the FOMC (very big player in the fruit scene!).

As far as auction stats to look for in 10 minutes, the recent average bid-to-cover (ratio of dollars bid to dollars auctioned) has been in the mid 2.5's. Some media outlets might have a higher figure here, but there was a marked change in so-called "BTC's" after Taper talk ramped up.

Additionally, EVERY auction since then (and two before it) have come in at higher-than-expected yields (meaning the apple buyers didn't trade the price down quite enough!), though the last one was right on the money. Markets have a running estimate of what the auction yield will be, traded in the form of the "when-issued" market. We'll update live chat with a when-issued yield level at 1pm (the auction bidding cut-off). It's currently 2.962, but may change in the next 10 minutes.

By way of update to the previous alert, Fannie 4.0s are now 2 ticks lower to 102-09, taking them into the moderate reprice risk zone. 2 reprices have already been reported. Given that those reprices arrived with only the "borderline" reprice risk levels mentioned in the last alert, we can't rule out the possibility that other lenders will be jumpy.

Then again, the only major lender to reprice so far is the jumpiest. Either way, the risk is out there, and it continues to be the case that a move to 102-06 would make it pervasive.

For what it's worth, 10yr yields only went 0.001% higher between the last alert and this one. Fannie 4.0s low of the day was only extended by 1 tick. Point being, the same sort of support that had a chance to hold last time is still somewhat intact, so this isn't currently the massive sell-off that makes for widespread rate sheet damage. Do what you will with that knowledge and we'll let you know if prospects for widespread damage change.