MBS Pricing Snapshot

We've discussed month-end buying in various contexts in the past and one of them is to fill portfolio positions for investment funds that must be balanced with various indexes. In other words, buyers were forced in earlier in order to get to their required fund allocations before month end. Even when that appears to be the case, it can turn out to be tactical trading that ends up reversing course by the 3pm Treasury close. Different story today as it was all real need-based buying. With just under 2 more hours left to fill last-minute index-filling trades, everyone's cards are being turned face-up, and all of them are "buy."

MBS takes part in this to a good extent and this is where a supply/demand imbalance really shines and helps MBS keep up with the Treasury rally much better than they otherwise would be able to, even though the rally is primarily a function of month-end buying in Treasuries.

Couple conclusions:
First, apparently more than a few accounts saved their month-end house-keeping until after Jackson Hole. We can accept that and indeed, it's one of the reasons we saw today as the first major opportunity to break out of the mostly sideways range since last Thursday. Second, we're running into new, stronger resistance targets here and next week is no longer month-end (obviously). When that temporary demand exits, what's left? Perhaps seeking out the next equilibrium ahead of the week's key events with the ECB and NFP?

It all goes back to the "lead-off" analogy. This one has gotten convincing. The runner is either going to have to commit to moving to the next base or hope for a base-hit. We're cautious about Tuesday for these reasons. Base-hits can't come until the big-ticket events actually start happening. As far as our little base-runner having the resolve to continue in spite of that and in the absence of today's month-end support, it FEELS like a tall order. Not sure if that just means we'll pause sideways or bounce back lower, but the POSSIBILITY that today's momentum isn't guaranteed is worth considering at least.

For now, additional reprices for the better are a fair expectation, depending on the lender. Sadly, we may not see as many as we otherwise would considering the lateness in the day and the 3-day weekend ahead.

(Reuters) - Spain overhauled its banks for the fifth time in three years on Friday to secure up to 100 billion euros ($125 billion) in European aid for lenders crushed by bad loans from an extended property market crash.

The government created a so-called bad bank to take over tens of billions of euros in defaulted loans and unsaleable property and to accelerate the clean-up of the banking sector, Economy Minister Luis de Guindos said.

Spain's banks are at the heart of the euro zone debt crisis, but the rescue has not cleared up doubts over the country's finances and the government is now under pressure to ask for a full sovereign bailout like Greece or Portugal.

Month-end retail buyers took the opportunity to buy the first major dips during the post-Jackson Hole volatility, and again bought on next dip just after 11am. That support helped MBS and Treasuries to their best levels since early August as the sideways grind sees a minor break in bond-market's favor.

After holding gains, headlines are helping bond markets eke out additional positivity after Spain's Bankia reported a €4.448 bln loss, further reinforcing the challenges facing Spain and the likelihood that Bankia will make use of emergency liquidity that is already set aside. Previously, Bankia said it would wait until new stress tests came out at the end of September before tapping the liquidity offer.

Stocks shot just over 5 points lower in S&Ps and 10yr yields dipped into the 1.57's. Fannie 3.0 MBS are up 11 ticks on the day now to 103-20. We've already seen a few positive reprices on the day, but recent gains make additional reprices an ongoing possibility.