MBS Live: MBS Afternoon Market Summary

It's interesting and perhaps a bit frustrating that a day with so much potential to motivate markets turned out to send MBS and Treasuries SIDEWAYS at the Treasury close and then weaker in the next hour. The auction gave bond markets a clear, quick boost, but there were two big hurdles to further extending the rally, and the gains turned around rather abruptly. This would have been an especially unwelcome surprise were it not for the nature of bond market's approach to prevailing trading levels at the time of the auction. Essentially, rates had not only rallied past the lowest yields in a month, but continued adding on to that rally in small, technical increments. By all rights, yields should have backed up a bit in anticipation of the auction, but did no such thing. So even though the auction was a triumph, by the time we factor in the aggressive approach as well as the FOMC Minutes that suggested a trade in the other direction (lack of QE3 reinforcement), we ended up with a relatively sideways to slightly weaker day. We think you'll agree that a step back to look at the bigger picture in 10yr yields would suggest that it's not qute as bad as the two-day charts make it seem. Even then, we have the potential for traders to reestablish longs thanks to this much needed back up. More on that tomorrow...

MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
FNMA 3.5
105-21 : -0-04
FNMA 4.0
106-28 : -0-01
FNMA 4.5
107-28 : +0-02
FNMA 5.0
108-23 : +0-03
GNMA 3.5
107-27 : -0-03
GNMA 4.0
109-21 : +0-03
GNMA 4.5
109-23 : +0-02
GNMA 5.0
110-16 : +0-03
105-15 : -0-03
106-19 : -0-01
107-10 : +0-03
108-03 : +0-05
Pricing as of 4:04 PM EST
Afternoon Reprice Alerts and Updates
Below is a recap of instant Reprice Alerts and updates issued via email and text alert to MBS Live subscribers this afternoon.

3:26PM  :  ALERT ISSUED: Bid Side Dried Up For Production MBS. Another Notch Weaker
As frustrating as it is to see America's sweetheart--Fannie 3.0 MBS-- having a hard time at the moment, it's happening. Sellers are looking to sell, and buyers are out for the day. Things are leaking lower into the afternoon. 10yr yields approaching the highs of the day and a late day mini-recovery for stocks isn't helping. We'd probably ramp up negative reprice risk at these levels, but would still say that not every lender is going to get involved with that at current levels (and probably not even a majority of lenders unless things weaken further).
3:14PM  :  ALERT ISSUED: Some Volatility After the 3pm Treasury Close. Auction, Meets FOMC Disappointment
Choppiness after 3pm is due to positional adjustments after the Treasury close. Nothing going on at the fundamental level.

Essentially, we got a boost from the auction and it was cancelled out by FOMC minutes that didn't do much to convince bond markets that they would be getting a big check any time soon. The post-auction rally was somewhat unsatisfying as it didn't have a chance to run very far given that markets rallied all week into 1pm today and are in all time low-yield territory. In that sense, holding sideways is a sort of rally.

Any aspirations of moving lower in yield were soon curbed by the upcoming FOMC minutes and it turned out to be a good thing as both sides of the market generally deflated on the lackluster notes from the Fed. So between the minutes and the auction, we're coasting along truing to hold the same old range we were trying to hold this morning. Pretty uneventful.

As far as reprice risk, we're still feeling like it's more of an issue at 103-15 or under in Fannie 3.0s. Pricing is pretty aggressive today though, so be on guard against any further deterioration here. An early cue might come from a break above 1.51% in 10yr yields. They're currently at 1.5065.
1:18PM  :  ALERT ISSUED: Shower of Sparks as 10's Run The Bases In Slow Motion
We're running out of allusions to The Natural in covering some of the more triumphant 10yr auctions over the past 11 months, but this one is right up there with August 2011. It would be just as easy to switch to Hulk references anyway, simply saying "10's...Smash!!!"

Indeed, 10's smashed through the 1pm when-issued yield with nothing short of brutality. Rarely do we see a 10yr auction stop through by more than 4bps, but at 1.459 vs a 1.501 1pm WI yield, today was 4.2 bps, just shy of the 4.3 from August, 2011. Most recent stop throughs have range from 0.4 bps to 1.2 for an average of .55 over the last 8 auctions.

The bid-to-cover ratio was evern more impressive though. 3.61 vs an 8 auction average of 3.1. A cursory glance tells us that only April 2010 had higher demand.

Following the auction, 10's immediately moved down to 1.465 and bounce hard there on profit taking and tactical shorts ahead of the 2pm FOMC minutes. Don't let the knee jerk fool you ! This is merely the "trader's sandbox" in action. The lines are no longer moving based on the auction. If it were up to the auction yields would be in the mid 1.4's or lower. What we're seeing now is a set up for the FOMC minutes.

If yields were to meaningfully break above today's highs around 1.533, then there might be more cause for concern, but failing that, we'll simply have to wait until after the FOMC minutes to see where markets really want to be. For now, somewhere slightly better than before the auction, but not quite as bullish as we'd like, is the most nimble perch from which to await the arrival of the minutes.

Because of all that "knee jerk" stuff, as well as the overall narrow range in MBS ahead of the knee jerk, positive reprices are not exceedingly likely until/unless MBS stay in the green or are improving after the FOMC minutes.

Fannie 3.0s are currently at 103-20, which was their high of the day before the auction.
12:59PM  :  10yr Auction Preview
MBS and Treasuries have held impressively narrow and resilient ranges ahead of the 10yr auction at 1pm, with no major concession despite markets' expectations.

After the 12:45 AM Fed auction bidding, WI yields (when-issued) for 10's are falling just under a bp and MBS are adding on a few ticks, essentially reinforcing the morning's range-trade.

As for the auction itself, today's is a reopening of the 1.75 coupon from the 5/9/12 refunding. Reopenings have recently garnered slightly better bid-to-cover ratios than refundings with a 3.17 average. The two bid-to-covers for this cycle have been 2.90 and 3.06, with the previous cycle bringing 3.05 on the refunding and 3.24 and 3.08 on the reopenings.

10's in general have had a tendency to "stop through" at lower yields than the 1pm WI. The "when-issued" yield (essentially the consensus estimate of where the auction will stop) is currently at 1.503, and we'll take an official mark at 1pm to compare to the auction results that follow about a minute and a half later.
11:30AM  :  ALERT ISSUED: Strength Overcoming Weakness After Fed Buying, EU Bond Close
By far the biggest surge in volume of the day was seen just after 11am. Two things occurred at that time: the conclusion of a round of scheduled Fed buying in the 2018-2019 range (6-7 yr) and the EU bond market close.

At first blush, both of those factors appeared to be net negatives for bond markets and both MBS production coupons were briefly in the red. 10yr yields rose by about 1bp in fairly short order as well.

The Fed buying results indicated that dealers offered up a lot of paper compared to what the Fed could buy (15.42 bln vs 4.77 bln purchased). This could tacitly suggest higher supply, lower prices, and higher yields, especially considering the expectation that bond markets will have to endure some weakness ahead of today's auction.

As for the EU Bond Market close, the implication there is that Treasuries had benefited to a certain degree from the low yields in German Bunds creating spillover buying, and would now potentially get less benefit after 11am with a less active Bund market.

Indeed it looked as if some sort of reversal could be taking hold, and we'd set out to alert you to that potential. But even as we started writing, the long end of the yield curve began firming up (i.e. 10's and 30's outperforming 7's and 5's). Additionally, Fannie 3.0's have outperformed 3.5's since 11am. This makes sense given that lower coupons have longer duration and longer duration debt is outperforming.

All told, we're left in fairly neutral territory after these post-11am gyrations, but on the low side of the recent range. While that range is narrow (103-16 to 103-20 in Fannie 3.0's), we'd stay on guard for a more meaningful concession ahead of the 10yr auction and FOMC minutes. 1.508 and 1.5133 would be the "bad" and "worse" technical levels to cross in terms of 10yr yields that would likely have a negative implication for MBS. Negative reprice risk increases around 103-15, and gets incrementally larger with each tick down.
Live Chat Featured Comments
A recap of the featured comments from the MBS Live Dashboard's Live Chat feature, utilized by hundreds of industry professionals each day.

Justin Dudek  :  "REPRICE: 4:00 PM - Everett Financial Worse"
John Paul Mulchay  :  "REPRICE: 3:59 PM - Flagstar Worse"
Matthew Graham  :  "nope, haven't seen anything super interesting yet"
Matt Hodges  :  "nothing shocking so far"
Steven Fishman  :  "i thought they went to a FHA saturation of 30%"
Tom Bartlett  :  "I think over 50% ??"
Chip Harris  :  "any remember off hand what the owner occ % is for condo FHA approval?"
Victor Burek  :  "santelli gave it an A+++++++"
Matthew Graham  :  "next auction will be a new 10yr coupon again"
Matthew Graham  :  "May was 10yr, june was 9, 11, and today is 9,10"
Matthew Graham  :  "yes TR, it's a reopening"
Ted Rood  :  "9 yr, 10 month notes???"
Tom Bartlett  :  "10 yr at 1.47"
Matthew Graham  :  "A++"
Matthew Graham  :  "Crushed it"
Matthew Graham  :  "RTRS- U.S. 9-YR 10-MO NOTES BID-TO-COVER RATIO 3.61, NON-COMP BIDS $7.52 MLN "
Matthew Graham  :  "RTRS- U.S. SELLS $21 BLN 9-YR 10-MO NOTES AT HIGH YIELD 1.459 PCT, AWARDS 51.68 PCT OF BIDS AT HIGH "
Matthew Graham  :  "WOW"
Matthew Graham  :  "marked WI at 1.501"
Tom Bartlett  :  "thx Chip. I will check them out. I see Plaza is better than INTERBANK today as well. on 30 yr at 3.375-3.75"
Chip Harris  :  "SunWest is right there with them and much easier to work with as of late."
Tom Bartlett  :  "Do you guys find INTERBANK consistently giving the most rebate on vanilla deals other than the dreaded PF?"
Ken Crute  :  "that's an investor overlay NOT a FHA guideline change, big difference "
Justin Dudek  :  "raised our FICO min to 660 for non credit qual"
Matt Hodges  :  "okay, that was individual lenders tightening"
Tom Bartlett  :  "FHA tighten up about 2-3 weeks ago when WF quit doing 3rd party streamers and it cascaded from there I believe."
Matt Hodges  :  "i guess we are just wondering about FHA tightening comment."
Justin Dudek  :  "no i just read an article about FHA delinquencies on the rise and FHA reserves getting cleaned out "
Matt Hodges  :  "was there a ML?"
Ken Crute  :  "when did FHA tighten their Streamer belt? "
Justin Dudek  :  "what do you guys think about FHA tightening the belt on streamers? "

Read what our user's have to say about MBS Live on LinkedIn.
» Start a two week free trial of MBS Live.