MBS Pricing Snapshot

Newswires are still hitting, and while there's no thunderous rally underway for MBS, details emerging regarding today's closed door meeting between the President and Congressional leaders have helped. So far, the news is underwhelming, which sent stocks to their lows of the day and helped bond markets reinforce the ground they'd already been holding.

MBS rose a few ticks as stocks sank, bu from a bond market standpoint, the reaction is more readily seen in the 1bp move lower in 10yr yields. Again, newswires are still streaming in and we may not have seen the end of this end-of-week reaction, but so far, it's looking to be positive for bond markets.

For all but the most sadistic lenders, this effectively shuts off any preexisting negative reprice bias. Positive reprice potential, however, is limited, apart from the sort of "stability" reprice" that a few lenders occasionally offer. Bottom line: positive shift in reprice risk, which at the very least, gets us back to neutrality--perhaps even better.

CNBC reported earlier that a Fiscal Cliff "mini-deal" could include a $400k income cap and a patch for the Alternative Minimum Tax. Separate headlines from MNI indicated that Senator Corker says a deal on taxes is likely either this weekend or in early 2013. Risk markets swung back in a less friendly direction for bond markets, similar to the move seen after the first Fiscal Cliff headlines of the day. Although MBS bounced initially, Fannie 3.0's are currently at their lows of the day.

At at 104-25, Fannie 3.0s are only 3-5 ticks off most lenders' rate sheet print times. In that regard, reprice risk is limited, but perhaps not inconsequential, depending on the lender. The bigger concern is where we could be headed of trends in broader markets continue into the afternoon.

There's a fairly pronounced "triangle" forming in the stock market (convergence of lower highs and higher lows over the past two days) that's set for a break out shortly. We'd imagine that a well-timed (and more meaningful) piece of Fiscal Cliff news could facilitate a move back to either the highs or lows from yesterday afternoon.

10yr Treasury yields have been riding an unfriendly uptrend of higher lows since just after 10am. If we see a concerted move with stocks breaking their triangle on the upside and Treasuries continuing their tortoise-like selling trend, MBS would likely have a hard time staying in positive territory on the day.

Negative reprice risk is once again "present," but we're not quite there yet as far as negative reprices being flat-out "likely." As always, a few outlying lenders may be considering pulling the trigger soon, but a majority would require 2-3 more ticks of selling.

Bond markets have effectively called the bluff of this morning's Fiscal Cliff headline suggesting that Obama would, today, offer a scaled-back Fiscal Cliff proposal. The initial burst of selling was the knee-jerk reaction and cooler heads quickly realized this offers no additional information beyond yesterday's rumors (CNN story and Scott Brown's Facebook posting) that Obama was offering a scaled-back deal. Consensus is shifting towards can-kicking.

10yr yields are off their 1.7165 highs, but only down to 1.711 currently. S&P's have dialed back 4 points from their highs and MBS showed are currently up 3 ticks at 104-28, roughly mid-range on the day.

A few conclusions:
1. It will take something meatier by way of Fiscal Cliff headline to cause wholesale panic in bond markets.

2. Simply ruling out wholesale panic doesn't mean we can rule out additional, moderate weakness between now and "meatier" headlines.

3. The correction greatly reduces any previously increasing risks of negative reprices among lenders who were out early enough with rate sheets. However, we're not seeing a triumphant stampede back to stellar levels, so we'd stay tuned and stay guarded against volatility as the afternoon approaches.