MBS Pricing Snapshot

Although the 104-22 resistance level ended up keeping a lid on most of the day's price action, Fannie 3.0 MBS didn't venture much below 104-19 for the balance of the afternoon and are currently 4 ticks lower on the day at 104-20. Reprices have gone both ways, with the most recent being positive, and while we wouldn't necessarily lean on that as evidence that more could follow, it at least speaks to some sort of volatile equilibrium between bulls and bears heading into the close.

Stocks are spiking mildly off their lows following news that Boehner will forgo that long and lonesome road back to Ohio in order to meet with The President today. S&Ps are still off about 10 points from their 10:20am highs.

10yr Treasuries don't seem to care much and have managed to traipse sideways between their morning highs and afternoon lows, currently up 2.6 bps on the day at 1.7282.

Both MBS And Treasuries were peeking across the fence of intermediate technical levels set up by yesterday's sell-off. Floor/Ceiling behavior was evident at 104-22 in Fannie 3.0s as well as anything from 1.70 to 1.714 in 10yr yields. Fannie 3.0s had edged up to 104-24 just ahead of the auction and 10's made it all the way to 1.704.

The auction came in weaker than expected with a 2.50 bid-to-cover versus a recent average closer to 2.60 and a stopping yield of 2.917 versus an expected 2.882. Bond markets initially pulled back to weak side of their technical lines in the sand. But pervasive weakness in equities markets combined with the small amount of "relief bid" following the week's supply needs (no more Treasury auctions to bid on - sometimes a marginal benefit even in the absence of strong results) helped bond markets get right back to the doorstep of those pivot points.

They haven't broken yet (in fact MBS just bounced off the 104-22 ceiling and 10's are back up to 1.723) but the fact that we're NOT selling-off any further feels like a decent enough turn of events considering the weak auction results. It's been a bumpy ride so far today, relative to recently narrower ranges leading up to the FOMC, but we should avoid excessive negative reprice risk if Fannie 3.0s continue to trade at 104-16 or above (currently at 104-19, 5 ticks weaker on the day). That said, some lenders may not enjoy the elevated level of volatility, despite the fact that outright prices aren't low enough to justify a reprice in and of themselves.

Both MBS and Treasuries are well off their weakest levels of the morning thanks to technical and tradeflow-based support that came in during and after the Fed's Twist buying operation from 10:15-11:00am. 10yr yields were technically in an uptrend through 11:00am but broke out of that trend channel right at 11am (though the highest yields were 20 minutes earlier). MBS simply held firm to their 104-16 support level mentioned earlier and have gradually followed Treasuries back into stronger territory.

To some extent the bond market bounce may have amounted to a capitulative risk-off trade following the big bounce lower in equities markets, but we'd hesitate to assume that's the case just yet. At the very least, the technical/tradeflow picture was supportive as well, with the big bounce lower occurring both sharply, with a noticeable increase in volume, and at the edge of an established technical zone around 1.75.

Since 11am, Boehner's comments on the Fiscal Cliff situation have helped equities continue to sell-off, though it looks like they're already trying to bounce. 10yr yields moved moderately lower with stocks and are subsequently moderately in tune with the bounce. 10's had a chance to break back below the mid 1.71's technical level and failed in a very clearly delineated fashion, not once, but twice. That's the line in the sand for broader bond markets at the moment and one that's not likely to be crossed without the help of a mostly awesome 30yr Bond Auction at 1pm.

As for MBS, negative reprice risk definitely ebbed with prices on Fannie 3.0s making it back up to 104-20 during all this volatility. But much like 10's, MBS have also encountered resistance at their own inflection point of 104-22. That'll serve as the MBS-specific line in the sand--to be tested on the chance we see a strong auction or are otherwise able to trade higher in the next hour. For now, it's overhead resistance.