MBS Pricing Snapshot

Coming into the day, we knew that Italian political headlines could be a risk as Italy's president said he would make an announcement. Just after headlines hit that President Napolitano is calling a meeting with Bersani (the guy he'd probably pick to give the "mandate to form a government" to), bond markets began selling off quickly and Italian credit spreads rocketed tighter.

Moments later, wires hit saying Cypriot lawmakers say a deal deal that adheres to the EU framework may be possible "within hours." Further rocketing ensured and 10yr yields are up 3bps in 12 minutes. MBS are holding their ground MUCH better but are well off their 102-29 highs at 102-24 at the moment. Lenders who priced early are rapidly approaching "reprice risk" territory.

Fannie 3.0's opened flat to yesterday's latest levels, but are 2 ticks higher now at 102-28. Meanwhile, 10yr yields are unchanged vs 5pm levels and 2bps lower vs 3pm levels. A low volatility morning for treasuries along with some urge to correct following 2 days of sharp underperformance are helping MBS close the gap, though they continue to underperform significantly on the week.

Overnight moves were uneventful in the big picture though some jolts were seen around the relevant Cyprus bullets. Chief among these are the following:

• Russia says no thanks to helping out Cyprus
• ECB Says bank defaults if no plan B by Tuesday, will impost capital controls
• Bank of Cyprus urges lawmakers to "take the deal!"
• Cyprus gov says they'll approve a plan B by Tuesday and prevent bank defaults
• "Bad Bank" scenario sees losses as high as 40% for uninsured deposits
• Cyprus may vote on Euro membership today!

Against that backdrop, European markets traded fairly calmly overnight, sensing that bigger considerations arrive next week. That doesn't mean we won't see tape-bombs today, but that's generally how it was traded overnight. Bund yields and Euros rose steadily from the outset of European hours and topped out just before 8am, helping Treasury yields do the same.

Earlier in the morning, 10yr yields saw strikingly regular technical resistance at 1.902, setting this up as a level that could come into play as resistance on any rally attempts this morning. For now, "so far so flat," with the aforementioned moderate MBS outperformance. We're on guard for Euro tape-bombs, but not necessarily expecting them. Italy's president is expected to make a statement today regarding the formation of a government, which could steal some spotlight from Cyprus. We're also expecting a relatively well-connected stock lever in the morning hours, so a strong open (coming right up in 5 minutes) could cause some volatility.