Posted
As you're aware, immediately following the auction, MBS prices shot down to 100-30, bringing things in line with the worst levels of the week. Tsy's exhibited similar behavior with 10's moving to 3.525. The yield curve steepened further and looked to be inching toward the all time highs. As you're also aware, we were expecting a correction within the range. But as you might not be aware until just now, we got it:
The volume coming into the market at this point looks to trump Tuesday's tally, especially with some afternoon data on the way (fed balance sheet, fed MBS buying etc...). Of high importance is the fact that the post-auctions sell off only explored recent limits of the trading range. This lets us know that today's auction was not the massive market event that would prove responsible for deflecting the bond markets from their range.
The yield curve remains slightly steeper on the day with 2's10's at 266.4 bps. A bit worse that Tuesday, and still very high, but not within striking distance of all time wides as of yet. This slight steepening correlates well with a slight preference for the higher end of the coupon stack. Last week's prepayment data led many analysts to identify opportunities in these premium coupons as well. So it makes sense that a steepening curve would add fuel to that fire.
Though stocks also lost ground following the auction, they haven't made it up to the same extent as the bond market... To whatever extent the stock lever has a bearing on the rest of the day, this could help bonds keep their head above water after the big "scare." Conversely, a stock rally probably wouldn't be great for bonds, but recent rallies have been remarkably disconnected from necessary losses in bonds, so even that would not put a nail in the MBS coffin.
Bottom line: the bond market is resilient, range-traded, still uncertain, and at the moment, moving higher with a purpose (albeit, a SMALL purpose). All that notwithstanding, the initial jolt downward was and potentially still is enough to prompt a few reprices for the worse. But at this point, those are no longer justified and if you don't get the pricing back today, a status quo for the rest of the session would likely bring them back by tomorrow's rates... Lenders that have not yet repriced are less and less likely by the second. Dare we even say that if current levels are held, a reprice for the BETTER might be in order? It all depends on the ongoing volatility situation. If we manage to hold fairly steady, the indication is good for the rest of the day.
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