Striking from the shadows, and gone before we even knew he was here, it's the MBS Ninja with your afternoon MBS delight:

Today's "tape-bomb", or volatile news item, was launched from the frontlines at FHLMC, somewhere in suburban Virginia, as they announced they would buy "substantially" all the 120+ day delinquent mortgage loans from the company's related fixed rate and adjustable program.

Quite a mouthful;  what it all means is that holders of premium coupons will get quite a call-out on their higher coupon bonds at par ($100). When someone owns a bonds at say $107, $108, that's a big P&L hit to absorb when all was deemed carefree.

(mg says: If an MBS coupon carries a price of 107-00, for instance, that means that the investor is paying $107,000 for a $100,000 loan.  The only reason you'd do that would be the expectation of interest over time.  That's why folks are so nutty about figuring out PREPAYMENT SPEEDS.  They want to know if the darn things will go slow enough to justify the higher cost.  So when ninja says "call-out," he's referring to the "call option" component of an MBS that gives it that known unknown of "how long is this thing gonna be around?!"  Big P&L hits come when there were a bunch of nice future cash-flows from MBS estimated based on the prepayment speeds that all of a sudden get paid back at the principle amount.  In other words, they paid 107k for 100k loan, and now they just get the 100k and are told to take a hike.  If they haven't made something north of 107k, guess who's grumpy!)

Bottom line, this should drive the subconscious trader lower on the stack and closer to par and further fuel a modest reduction to primary rates-all things being equal.  (mg says: lower on stack = lower rate MBS coupons like 4's through 5's for the obvious, if not the only reason of far less PREMIUM to the principle amount.  in other words, those investors will earn less monthly interest over time, but they'll be paying 101k to 103k for instance, for every 100k in principle).

P.S. FNMA just announced the same intention a few hours later  

The Freddie news combined with other balls already in motion, such as the developing Germany-led backstop for Greek Sovereign debt, to set the trends in motion in the bond market.  As it seems now, with only an hour and change left, we're set to end up very much in line with those trends, and recalling the auction reaction as a mere blip of volatility against the bigger picture.  Maybe a bullish auction could have done something to help stem the losses suggested by these trends, but now, we'll never know :-(  Whatever the case, the Freddie news is FAR more interesting and certainly SIGNIFICANT to the MBS Market.