Fannie 3.5 MBS are 4 ticks up on the day now at 102-13, within a tick of their highs. Things had been trading fairly sideways following a relatively strong 7yr Note Auction, but over the past 30 minutes, stocks have fallen well into their lows of the day and Treasury yields have been mostly content to follow. The 10yr yield is down to 1.98.

At these levels, and with the auction behind us, lenders are more likely to reprice for the better. It still might not be something that a majority of lenders participate in, but if recent gains hold, or are improved upon, we'd expect more and more reprices to happen into the afternoon.

Various statistics from the last 5 7yr auctions (BTC = Bid-to-Cover ratio and "vs WI" is the difference between the 1pm when-issued yield and the auction's stopping high yield in terms of bps, so 0.7 bps = 0.007% ):

..Date......... BTC......Yield .....Indirects... vs WI
8/25/11 ..... 2.76......1.580.....51.7%.......0.7 higher
7/28/11 ..... 2.63......2.280.....39.6%.......1.9 higher
6/29/11 ..... 2.62......2.430.....32.2%.......3.5 higher
5/26/11 ..... 3.24......2.429.....47.6%.......0.7 lower
4/28/11 ..... 2.63......2.712.....39.1%.......3.70 higher

Average BTC = 2.77
Average Indirects = 42.04%
Average Tail = +1.82 bps (high yield is this much higher than WI on average)

As you can see based on 4 out of the last 5 auctions coming in at higher than expected yields, 7yr issues can be challenging of late. But on the past occasions where 5 and 2 yr auctions have come in better than expected earlier in the week, so too have 7's.

There's also the unknown impact of potential Fed-Buying considering this will be the first auction since the FOMC statement that is eligible for Operation Twist buying. 7's haven't built in much of a concession today so if we don't see one heading into the auction, even an on-the-screws result would constitute a good auction.

Depending on whether or not a given lender repriced for the better yesterday afternoon and depending on where they priced this morning, there's a small chance you could see a reprice for the better even before the upcoming 7yr note auction at 1pm.

Fannie 3.5's are up 1 tick on the day at 102-10 after having been as low as 102-02 earlier this morning. Any lenders who priced near those lows are certainly seeing enough gains to offer a token reprice, but recent volatility as well as the upcoming auction makes reprices less likely than they otherwise would be.