MBS Pricing Snapshot

Over the past few session, it increasingly seemed that markets were trading the "Romney Hedge." The deduction seemed to be simple enough: Romney would have been worse for rates and less friendly for mortgages. Thus, when Friday's jobs report was strong, yet bond markets turned around to rally by the end of the day with MBS outperforming Treasuries, the best explanation left is that markets inferred the stronger jobs numbers solidified an Obama victory.

The intervening time saw a bit of back and forth on that sentiment, probably creating the volatility we saw on Monday and Tuesday. It's been somewhat uncomfortable to lean so heavily on the election as a market mover, but thankfully we didn't have to wait too long for confirmation.

And confirmation came in a big way as bond markets are resoundingly improved in massive volume. It's not that there aren't other factors--European factors--that remain in play, but they're not nearly a sufficient explanation of the movement and volume seen during the overnight session, PARTICULARLY the bigger pick-up in volume that occurred as domestic traders began their days.

Bottom line, the cases have been presented and the verdict is in. Treasuries and MBS are at their best levels since mid-October because of the election results. Fannie 3.0s are 26 ticks higher and have been holding fairly steady around 105-10, currently 105-12. 10yr yields are down a mighty 12 bps at 1.63. Stocks are plummeting at the open and futures were already down around 20 points in the S&P before the open (overnight peak to trough).

The lingering question: Great, so what now? In other words, now that the election has been resolved and the "Romney Hedge" seen to have been a real hang-up over the past few days, where do we go from here? If we equate the next several weeks and months to "one night of partying" for MBS/Treasuries, we're not exactly sure where the rest of the night will go, but we're not tired yet and the party is moving to Europe's house, and stands a good chance to make periodic returns to our own "House" due to the fiscal cliff.

For today, there seems to be a good amount of positional adjustments and structural trading that needs/wants to take place in the wake of the Obama victory, we we're taking it all in for now. The 10yr Treasury Auction at 1pm is the first reasonable acid test for bond market sentiment following the election and the only significant piece of data we'll get today.