MBS Pricing Snapshot

More of a heads-up than anything... Prevailing MBS prices during most lenders' rate-sheet creation times: 104-14 to 104-16

Current Prices: 104-10 to 104-12

This probably isn't cause for too much concern for most lenders, but a select few have been known to consider reprices in such situations. Things are slow, drifty, and sideways at the moment, but also a bit on the weak side of the day's range since 9AM.

Despite a good bit of disconnection earlier, an equities sell-off into the close seems to be helping bond markets' resolve to hold their most recent support levels (1.8136 in 10yr yields or 104-10 in MBS).

MBS and Treasuries are weaker after the 7yr Note auction, but NOT because of it. The auction itself wasn't traded nearly as heavily as the 10 minutes leading up to it, or in the 10 minutes following the results. If the auction had caused the most recent pop, we would have seen the flows hit right at the 1:01:30pm release of the results. Not the case

Causality matters less than movement, however, as we're simply noting the technical continuation of the selling trend in place since this morning's Fed "Twist" buying. Fannie 3.0s are still up 6 ticks on the day at 104-13 but dipped briefly to 104-11 just now, the lowest levels since rate sheet time. 10yr yields rose to their highest levels since the 9am hour, hitting 1.805 before falling back just under 1.80.

These aren't major movements, but it's important to note the regularity of the persistent trend weaker since 10:30am. In terms of outright price levels, we're not into territory that justify's negative reprice risk, but for some lenders, the trend is sufficient cause for concern even if it hasn't quite delivered 4+ ticks of losses.

Stay on guard against ongoing weakness into the afternoon. There's an outside chance that a lender or two would reprice negatively here, but those likelihoods increase if we head below 104-12 in Fannie 3.0s.

(quick note: "Post-POMO" has more of a ring to it than "the time frame immediately following the Fed's almost daily scheduled permanent open market operations purchasing a predetermined dollar and maturity range of US Treasuries under Operation Twist.")

As we've noted on numerous occasions since the inception of Twist, the scheduled buying that typically concludes at 11am often times coincides with the best levels of the day for bond markets, all other things being equal. To oversimplify the dynamic: if the Fed's coming in as a guaranteed buyer of a set amount of dealer's inventories, why not push prices higher ahead of the takedown?

This certainly isn't a hard and fast rule, but more often than not, there's at least a bit of volatility at 11:02am on POMO days, usually in a negative direction for bond prices. That's currently the case, but more so for Treasuries than MBS. Still, a bit of caution is in order, as we look to defend our nice little bounce back today.

Fannie 3.0s were as high as 104-17 at 10:30am but quickly hit 104-11 just after 11am. The pressure is somewhat off at this point, as prices have returned to 104-15, right in line with yesterday morning's highs, but the defensive vibes are more a product of Treasury trading.

Like MBS, Treasuries hit their best levels of the morning at 10:30am and bounced back just after 11am. This amounted to a move from 1.775 to 1.795. There was a good supportive bounce there, but the risk is that 10:30am marked the best levels of the day with a slow leak into weaker territory from here.

Approaching that eventuality is pretty simple... Stay defensive against breaks of those recent weak spots (104-11 in Fannie 3.0s and 1.795 in 10yr yields). With those levels currently at 104-15 and 1.7857, we look to be on cruise control, but wouldn't take for granted that the rest of the day will be effortlessly bullish. Next scheduled event: 7yr Note Auction at 1pm. Minor market moving potential.