MBS Pricing Snapshot

This was one of the most poorly received 10yr Treasury Auctions that we have seen in a long time. The bid-to-cover was a low 2.49 and the auction's stopping yield was 2.6bps higher than the 1pm WI. For an auction that typically has a stop through at lower than 1pm WI yields, that's a pretty negative result. The bid-to-cover was far below recent averages, even when adjusted down for the typically lower "refundings."

10's and MBS were immediately off to the races to lower levels. The knee-jerk response is still playing out. For now, 10's hit their highest tick at 1.663, painfully close to a very epic pivot point at 1.67. We know (or hope, at least) that market participants may be looking to reload longs when sufficient weakness is achieved, and whereas 1.63 may have been too low for them, we can hope that 1.663 does the trick.

So far, 10's have bounced back to 1.6439, but are not stampeding back to lower yields. MBS are the stars of the bounce-back show with Fannie 3.0's already back up to 103-11, miraculously 2 ticks higher on the day. This COULD help us avoid negative reprices if we continue to hold ground here or improve upon it.

We'll update you again if we move more than 3 ticks from here. For now, reprice risk is ebbing from "certain" to "undecided."

That's all for now... Wanting to get this out fast. more to follow...

10:30am to present has been relatively unfriendly for domestic bond markets for at least one--and up to three reasons. The most salient among these is the 11:02am release of scheduled Fed Treasury buying details for today's 25-30yr open market operation. The Fed bought $1.95 bln, and always buys an amount within a predetermined range. Somewhat surprising was the relatively higher-than-normal amount submitted by dealers for the Fed's consideration--$5.90 bln--which suggests dealers are at least WILLING to be sellers of the long end, and are possibly even intent on it.

By the time other market participants account for that implication of selling pressure in the long end, it creates a characteristic post-Fed-buying spike. We've seen these on many occasions, but this one is being a bit stubborn, perhaps because it's reinforced by several other factors at the moment:

1. European bond markets hit their best levels at 10am and then headed higher in yield into their 11am close.

2. Equities markets were rallying during this time as well, and continue to do so.

3. 10yr auction at 1pm, and it's common for markets to build in a "concession" to better facilitate the auction supply.

Whatever the actual weight of these events might be, what's clear is that we just go hit with a course correction on an otherwise mildly bullish day. It's likely not severe enough for reprice risk at current levels, but Treasuries have turned negative and Fannie 3.0's are back down to 103-10 after hitting highs of 103-14 earlier in the session.

We'd expect MBS to continue to hold their ground relatively well vs Treasuries ahead of the auction, as long as things don't get too volatile, but would be concerned about reprice risk on any significant break below 103-09.