HUD Secretary Shaun Donovan issued the following statement upon release of the proposed risk retention rules: “The goal of the proposed rule released today is to provide clarity and rules of the road to the securitization markets. The proposed rule is one part of the Administration’s goal of bringing private capital back into the housing finance system. Getting this right is critical. With the financial crisis, we saw how bundling and packaging mortgages to sell on Wall Street with no accountability helped lead to the erosion of lending and underwriting standards that fed the housing boom and deepened the housing bust. The Dodd-Frank Wall Street Reform Act requires that securitizers or originators have ‘skin in the game’ by retaining at least 5 percent of the credit risk and the rule proposed today sets out options to accomplish that mandate. Importantly, the rule seeks to define qualified residential mortgages - the loans that would not be subject to the risk retention requirements. Much debate will center on the size of down payments. While there is no question that larger down payments correlate with better loan performance, down payments only tell part of the story. That's why we have laid out two alternatives, one requiring a 10 percent down payment and another requiring 20 percent. We look forward to comment from stakeholders on the relative merits of these choices, so that we strike the right balance between managing risk and maintaining access to safe, responsible homeownership.”

After actually breaking above 3.50 between 1:30 and 2:00pm, 10yr yields rallied back into the 3.48's / 3.49's for the 3pm official close. These are the highest yields since 3/8/11 and the 3pm mark and falls within a range of yields that have seen several support and resistance bounces since December. FNCL 4.5's have zoned in on a 101-17 level for the PM hours and in a consolidating range. Due to tightening versus treasury benchmarks, this is NOT as low as the 101-13 seen yesterday, and roughly in line with the majority of yesterday morning's weakness.

10yr yields tested their previous high yields of the day and broke higher, currently at 3.493. FNCL 4.5's briefly ticked down to 101-15 and are now holding at 101-16. Reprices for the worse are highly likely if you haven't seen them yet, and if that is indeed the case, you're looking at larger adjustments than mere .125's seen earlier today.

If you have not yet seen a reprice for the worse, they remain likely. 10yr notes are at 3.483 currently, up about 4.5 bps on the day while FNCL 4.5's are down 8 ticks on the day at 101-17. 101-20. Below 101-20, reprice risk increases until reaching 101-13 at which point we'd be looking at a 2nd round of reprices and the certainty of first time reprices. In terms of 10yr notes, relevant technical levels include 3.49 which is today's previous high, followed by 3.50 and 3.56. On the bullish side, we need to rally THROUGH 3.478 in order for charts to generate a bullish signal for bonds for the rest of the day. This would likely accompany an MBS market breaking back into 101-20's in FNCL 4.5's.

U.S. SELLS $35 BLN 5-YEAR NOTES AT HIGH YIELD 2.260 PCT, AWARDS 11.14 PCT OF BIDS AT HIGH *** BID-TO-COVER RATIO 2.79, NON-COMP BIDS $121.31 MLN *** PRIMARY DEALERS TAKE $16.19 BLN OF 5-YEAR NOTES SALE, INDIRECT $14.79 BLN

With 20 minutes to go until the 5yr note auction, a preparatory concession is in process as bond yields rise despite falling stocks. 10's are at 3.476, as high as they were on 3/28. FNCL 4.5's are understandably less affected by auction supply and are resisting the sell-off a bit, currently down 6 ticks on the day at 101-18. Reprices for the worse are an increasing risk at these levels.

While it's by no means a certainty that lenders will reprice for the worse ahead of the auction, the risk now presents itself with FNCL 4.5's at 101-19+. 10yr yields are at their worst levels of the day at 3.465 and have stayed moderately connected to stocks. If any lenders reprice soon, it's likely to be minimal unless the market falls further, and quickly.