• $40 bln in 5 year notes
  • 2.47 high yield with 40% taken at high yield
  • significantly higher than WI yield
  • Bid to Cover - 2.4
  • 17.85 bln taken by indirect bids - 44.6%

The 10yr note is off 4 bps so far and the Fannie 4.5 is down 11 ticks on the day now, off the pre auction levels of 100-17 down to 100-08.  Reprices for the worse are likely on the way.

NOTE: charts, official results, and continued analysis will be timestamped and appended to this post shortly

Ok, here's your update and here's what's going on.  I know there's probably a fair deal of panic at the moment, but fear not!  At least don't fear until the FOMC minutes are a known quantity.  The market call at the moment is really this simple: A slightly weaker than expected 5 yr auction is causing nominal concessionary selling WITHIN THE RECENT RANGES across the curve.  This currently has the 10yr up to 3.495 and showing signs of stalling out before violating the range.  Though MBS have broken their range on the downside, it's understandable considering the extra effects of extension risk introduced by convexity as the 4.5 coupon nears PAR.  In other words, MBS have a lot more to fear from a bond bear market right now.  Finally, all this is exacerbated by the impending FOMC minutes release in an hour which would likely cause bonds to "lead off" like a runner getting ready to steal the next base.  Bonds are "leading off" to the edge of the "safe zone" (read: extremes of recently accepted range), in order to be in the most advantageous position to move higher in yield should the FOMC minutes suggest that they do, but not so far that if FOMC minutes are bond bullish that they cannot have a decent chance of getting safely back to base.  MBS, for the reasons of convexity noted above simply have to lead off a little bit more.

Considering the preliminary hint of a parabolic bounce in the 10yr exactly at resistance levels, even if they do manage to move out of the range in yield, it won't be by much.  More likely, as said above, the extremes of the recent range in the 10yr serve as the maximum distance the yield can move without knowing the result of the FOMC minutes.  Once that's in however, all bets are off.  So although you see reprices now and prices are down, a friendly FOMC print would completely reverse that considering the 5yr auction was not bad enough to justify the moves we're seeing now.  If, however, the FOMC statement is unfriendly, the initial post-auction upward spike in yields is only a portion of the damage for today.  If the FOMC statement were hypothetically cancelled, we'd probably pick right back up to the limits of the range, leaving MBS at 100-11 ish and the 10yr somewhere close to but under a 3.51 yield.  Interestingly enough, if nothing of consequence is released in the minutes, it will in fact be as if the meeting was cancelled according to bond prices at the end of trading today.

Only other caution: lenders likely DID NOT take away enough on rate sheets to account for additional selling in MBS.  If thinks deteriorate post-FOMC, another round of reprices for the worse could be imminent and severe.  Don't panic yet though...

MBS, Tsy, and LIBOR Quotes