MBS Pricing Snapshot

First thing's first, MBS have bounced back AFTER the strong 5yr auction, but not necessarily BECAUSE of it. That's an important point to make these days as we're tasked with the ongoing process of disconnecting our previous worldviews regarding the level of correlation between shorter-term Treasury auctions and MBS trading levels.

In other words, the strength of any Treasury auction of 2-3yrs has had little impact on MBS prices following the auction. We credit this phenomenon largely to the Fed's low interest rate verbiage essentially spelling out the length of time that interest rates will be "exceptionally low." Therefore, policy verbiage of "through late 2014" was as good as saying "2yr Treasuries don't need to move much off the floor."

With the recent move to "mid 2015" in the verbiage, combined with the general outlook for the time period of "low rates," we'd pondered this morning whether or not we'd see 5yr Auctions fall victim to the same lack of importance.

Now that the auction has passed, and triumphantly so, we see that this is indeed the case. There was VERY LITTLE reaction to the auction itself with the yield highs of the day already well established around noon.

Perhaps the weakness that had been creeping in before the auction would have continued if the auction was awful, but whatever the case, the lion's share of volume is now being seen on reactions to tradeflows and technicals, the "stuff" that moves markets when there's no clear case for cause and effect derived from news and events.

Keep in mind that this week is "month-end" and "quarter-end." Accounts will be adjusting portfolio positions for these important marking periods and as of now, they're obviously buying. 10yr yields are down over 5 bps on the day at 1.618 and Fannie 3.0 MBS are up 9 ticks at 106-01. We've already seen a few positive reprices and more will follow if we maintain current levels.

Although we're only now getting to levels that are far enough away from "rate sheet generation time" to connote negative reprice risk, the trend since 11am has been toward selling for MBS. Fannie 3.0s topped out at 106-03 and ground sideways between 9:30 and 11:00am, holding a floor of 106-00 quite well.

After that support broke down at 11am, prices have slid a few ticks to 105-29, basically in line with a pivot point from this morning's highs. Negative reprices are only a small possibility among the jumpiest lenders, but if we fall further, risks would increase. 105-26 is the key defensive line in the sand if we break below 105-29.