We started the week with a closer look at "tradeflows,
" suggesting the most informative thing markets would have to offer guidance until today's 10yr Note auction would be other traders' trades. Indeed, this has been an almost exclusive theme for the past three days, but rather than stimulate much by way of new and exciting directional movements, traders have basically agreed to put a tourniquet on last week's bleeding and slowly try to "walk it off" this week. Progress has been slow and steady, but without a marked break below the mid 1.86 retracement level in 10yr yields, broader bond markets are better characterized as sideways than a decisively bouncing back. That "sideways to moderately better" theme hasn't been altogether unfriendly for MBS, which crept back to levels that are quite close to the pre-FOMC-Minutes sell-off. Rates aren't back there yet, but we have the roll coming up tomorrow, so prices have to be taken with a grain of salt (considering in 2 days, they'll drop by 8-10 ticks as February coupons take over). Bottom line, despite the better levels, things still feel "sideways and waiting for guidance." Tradeflows continued to offer a surprising majority of today's guidance as the 10yr auction came off like more of a housekeeping annoyance--something to be dealt with while adhering to trends previously suggested by the morning's flows. What changes this? We don't know, but we hope we're not waiting for debt ceiling developments to find out.
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing
is available via MBS Live.
Pricing as of 4:03 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
MBS Hit Two Day Highs, Positive Reprices Not Inconceivable
Bond markets definitely found their footing after the weaker-than-expected Treasury auction, perhaps realizing that had it not been for the 1 hour rally from noon to 1pm, the auction would have been stronger-than-expected. It wouldn't make sense, then, to trade to any weaker levels than those seen at noon, right?
Right! And so we haven't. In fact, MBS just hit session highs (best levels since FOMC Minutes), and 10yr yields are within striking distance of their lows of the day. That being said, it's a day before settlement and liquidity on the secondary market isn't at its peak. Couple that with the fact that we're only 2-3 ticks higher from rate sheet time and widespread positive reprices are far from guaranteed, but it's possible that an early adopter or two could at least offer a "stability reprice."
Fannie 3.0s currently up 3 ticks at 104-15 and 10yr yields down about a bp at 1.855.
Following Weak Auction, Bond Market Weakness Only Temporary
To refer to the 10yr auction that just happened as "weak" is perhaps overdoing it. If we simply look at the auction statistics vs those of other auctions, it was on the weak side. Bid-to-cover at 2.83 was noticeably lower than the average for 10yr Re-Openings and the stopping yield was about 1bp higher than expected (based on the 1pm "when-issued" yield). But if the auction is viewed in the context of the day's trading direction, we see a fairly healthy rally in the hour leading up to the auction.
In other words, there was a good amount of last-minute horse-trading between noon and 1pm. There was a growing amount of buzz for a strong auction and markets began betting on that eventuality, building a mini-snowball that carried yields 3bps lower in that hour. Had the auction gone off prior to said snowball, we'd be looking at much stronger results.
That's why we saw the initial pullback in yields and MBS prices (the fact that the auction didn't quite live up to the last-minute horse-trading), and the aforementioned "context" is why yields have found what looks to be a firm ceiling before breaking back above the pre-rally highs. Markets are essentially seeking out the levels that likely would have prevailed in the absence of the rally.
Post rally, that = selling pressure, but in context , just a continuation of the same old trend of sideways-to-slightly-better levels that began after Friday's NFP sell-off. Just another brick, and not a lot of suggestion as to the rest of today's trading. Bottom line, MBS are hanging tough, still at or near unchanged levels, currently up 2 ticks at 104-14 after being as low as 104-11 after the auction.
Live Chat Featured Comments
Andy Pada : "REPRICE: 3:14 PM - AMC Better"
Matthew Graham : "from a pure price standpoint (i feel the need to qualify the statement given some recently more "jumpy" behavior on the part of a select few lenders), yes, maybe 104-10 as a more conservative line. With the slide into the 10am hour, rate sheet print time is a bigger factor than usual."
Matt Hodges : "much of the pricing today occurred at or below these levels, so i anticipate we are in good shape until say 104-09, MG?"
Christopher Stevens : "I don't see this auction causing any strong move in rates that would cause a need to lock instantly"
Matthew Graham : "yeah, leaves more questions than it answers"
Andrew Horowitz : "and the auction did nothing to remedy that dilemma for them"
Andrew Horowitz : "desks still trying to figure out if we trade above 1.87 for the new range or below, all non committal as of now"
Gus Floropoulos : "one would have assumed a bit more demand due to slightly more attractive yields, however fiscal cliff procrastination along with debt ceiling looming must've played a roll"