Right from the outset, seemingly strange things were happening as 10yr yields looked much higher on charts, yet were reported as being slightly lower than the previous session. This can happen four times a year on the day after the quarterly refunding auction (which was yesterday). This is basically like "the roll" for Treasuries and the newly created security is now the representative for 10yr yields.
Much like MBS trade multiple delivery months at a time, Treasuries trade on a "when-issued" basis before an auction. This means there are two yields in play: the cash yield that the world sees on the web and TV, and the when-issued yield that markets use to improve liquidity surrounding the auction process. Much like MBS, securities that are "farther in the future" (like a June MBS coupon is farther in the future than a May MBS coupon) are slightly lower in price and higher in yield. So despite the strong auction yesterday and lack of movement overnight, 10yr yields opened higher because they're now based on the newly created security from yesterday's auction.
Today's auction of 30yr Bonds was not nearly as well received and made for bond market weakness in the afternoon. Fortunately, there was enough strength intact from the morning's central banker speeches (Yellen and Draghi) that we're now coasting out in relatively unchanged territory.
You might not know it though, based on MBS charts. The Fannie 4.0, particularly, looks like a volatile mess. This has everything to do with the MBS Settlement process. The most important thing to understand about volatility on the day that MBS roll to the next month's coupons is that there is hardly any trading still happening in the "front month" by mid-day.
An absence of trading means that any bid/ask quotes entered into trading systems are going to have a huge, immediate effect on displayed pricing, even if they aren't indicative of trades actually being executed at those levels. Complicating things even more was the fact that lower coupons outperformed in general as the rate rally increases appetites for 3.5s vs 4.0s. Bottom line: Fannie 4.0s are showing -4/32nds at the moment, but based on all the relevant behind-the-scenes considerations, MBS are actually flat to slightly improved on the day. Expect prices to open 8-12 ticks weaker tomorrow after the roll.
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing
is available via MBS Live.
| MBS || |
98-06 : +0-01
102-13 : +0-03
105-09 : -0-04
| Treasuries || |
0.3909 : -0.0121
2.6125 : -0.0095
3.4328 : +0.0298
| Pricing as of 5/8/14 4:40PMEST |
Today's Reprice Alerts and Updates
3:42PM : ALERT ISSUED: What's Up With Weird Moves in MBS?
1:16PM : ALERT ISSUED: Post-Auction Sell-Off bouncing back; Negative Reprice Risk Decreasing
1:03PM : ALERT ISSUED: Bond Markets Sharply Weaker After 30yr Auction Falls Flat on Face
10:58AM : Best Levels of the Day After Yellen Comments
8:55AM : Bond Markets Unchanged Overnight; MBS Edge Into Positive Territory
MBS Live Chat Highlights
Matthew Graham : "RTRS - U.S. SELLS $16 BLN 30-YEAR BONDS AT HIGH YIELD 3.440 PCT, AWARDS 58.90 PCT OF BIDS AT HIGH"
Matthew Graham : "RTRS - U.S. 30-year bond BID-TO-COVER RATIO 2.09, NON-COMP BIDS $22.46 MLN"
Matthew Graham : "when-issued was 3.405"
Matthew Graham : "so this is like a D-"
Victor Burek : "Santelli gave it a D-"
Ted Rood : "At least it wasn't an F+"
Matthew Graham : "shouldn't be a game-changer for MBS, but an unpleasant speed-bump"
Michael Pennington : "Cash-out on new home value is 6 months correct?"
Michael Pennington : "I only ask becuase someone else is telling me 12 months"
Jay Rodriguez : "Agency Direct is 6 months."
Benjamin Biscoe : "has anyone had issues getting an LP accept when a borrower has had a foreclosure? its been more than 3 years so freddie should allow. 1st and 2nd mortgage on the foreclosure, on the credit report 1st shows 2/12 but 2nd shows 5/13. i am thinking its getting referred because the 2nd is shown as less than 3 years. "
Steve Chizmadia : "Any notations on the second that it was settled for less?"
Benjamin Biscoe : "shows as charge off"
Steve Chizmadia : "Oddly Freddie will allow a foreclosure after 3 full years with at least 10% down and a LP streamline accept, but they will not allow it with a pre-foreclosure or short sale. Just went through this and because of the reporting on the second, I can only look at FHA"