Today may turn out to be one of the last few bits of weakness before bond markets finally put their foot down and re-establish the previous bullishness that has recently been so familiar. Or it may be a trap. Admittedly, we're more concerned with guarding against the possibility that it's a trap than making the right guess about what's happening. On the topic of such guesses, it continues to make sense from a fundamental standpoint that Europe is not fixed and because of that, weakness in bond markets is more likely to be temporary.
That said, there are two counterpoints worth considering. First is that we won't know that Europe is fixed until after it has already proven itself to be. At face value, recent ECB news doesn't seem like it will stand out as THE defining transition from failing to recovering, but perhaps combined with events in the near future, it could turn out to be. That's a long shot, and too speculative for us to get into. On the more objective side, we have charts.
The following 3-in-1 chart is dedicated to the aforementioned notion of "guarding against the possibility" that we're in somewhat of a persistent pattern of weakness, if for no other reason than it seems to be possible based on the charts and also because we've recently enjoyed such an uncanny, stable period of positivity for rates. This isn't meant to change your mind on what to do with your pipeline necessarily, but merely to help ground your thought process in case you weren't already considering "stuff like this:"
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 4:08 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
Worst 10yr Auction in Recent Memory. But MBS Bounce
This was one of the most poorly received 10yr Treasury Auctions that we have seen in a long time. The bid-to-cover was a low 2.49 and the auction's stopping yield was 2.6bps higher than the 1pm WI. For an auction that typically has a stop through at lower than 1pm WI yields, that's a pretty negative result. The bid-to-cover was far below recent averages, even when adjusted down for the typically lower "refundings."
10's and MBS were immediately off to the races to lower levels. The knee-jerk response is still playing out. For now, 10's hit their highest tick at 1.663, painfully close to a very epic pivot point at 1.67. We know (or hope, at least) that market participants may be looking to reload longs when sufficient weakness is achieved, and whereas 1.63 may have been too low for them, we can hope that 1.663 does the trick.
So far, 10's have bounced back to 1.6439, but are not stampeding back to lower yields. MBS are the stars of the bounce-back show with Fannie 3.0's already back up to 103-11, miraculously 2 ticks higher on the day. This COULD help us avoid negative reprices if we continue to hold ground here or improve upon it.
We'll update you again if we move more than 3 ticks from here. For now, reprice risk is ebbing from "certain" to "undecided."
10yr Auction Bombs, Probable Reprice Risk - More to Follow
That's all for now... Wanting to get this out fast.
more to follow...
Post Fed Twist Buying Volatility. MBS Shed A Few Ticks. Near Unchanged
10:30am to present has been relatively unfriendly for domestic bond markets for at least one--and up to three reasons. The most salient among these is the 11:02am release of scheduled Fed Treasury buying details for today's 25-30yr open market operation. The Fed bought $1.95 bln, and always buys an amount within a predetermined range. Somewhat surprising was the relatively higher-than-normal amount submitted by dealers for the Fed's consideration--$5.90 bln--which suggests dealers are at least WILLING to be sellers of the long end, and are possibly even intent on it.
By the time other market participants account for that implication of selling pressure in the long end, it creates a characteristic post-Fed-buying spike. We've seen these on many occasions, but this one is being a bit stubborn, perhaps because it's reinforced by several other factors at the moment:
1. European bond markets hit their best levels at 10am and then headed higher in yield into their 11am close.
2. Equities markets were rallying during this time as well, and continue to do so.
3. 10yr auction at 1pm, and it's common for markets to build in a "concession" to better facilitate the auction supply.
Whatever the actual weight of these events might be, what's clear is that we just go hit with a course correction on an otherwise mildly bullish day. It's likely not severe enough for reprice risk at current levels, but Treasuries have turned negative and Fannie 3.0's are back down to 103-10 after hitting highs of 103-14 earlier in the session.
We'd expect MBS to continue to hold their ground relatively well vs Treasuries ahead of the auction, as long as things don't get too volatile, but would be concerned about reprice risk on any significant break below 103-09.
Live Chat Featured Comments
Matthew Graham : "we'll see. it's always a court case. this is a strong argument, but we won't know until we hear the sentence. Even with the techs, it's still hard to so quickly abandon the notion that the Euro zone will continue to depress bond markets. But all reversals have to start somewhere I guess."
John Paul Mulchay : "so based on that, MG, we have about 2 weeks to live"
Christopher Stevens : "based on the morning report from MG I locked most of pipeline going into the auction. MND proves again why it is the best site. My loan officers thank you!"
Matthew Graham : "charts looking disturbingly similar to 10/26/10. Will definitely put that on the RECAP tonight."
Matthew Graham : "unless that's the highest yield we see for the next month, it's hard not to view this whipsaw as another tidy little piece in an ongoing uptrend."
Matthew Graham : "BB... Ummm.... Longs want to reload as long as the Euro isn't "fixed," but were perhaps not quite there yet without a firmer support level such as 1.67-ish? I don't know... I'm reaching here. The auction was surprisingly bad. "
Brent Borcherding : "MG--Tell us something good about how nobody showing up for the auction today after yields had jumped up significantly over the last 2 weeks, really is no reason for alarm. Please."
Matthew Graham : "yes, fairly light this week, but had been average so far today."
Brent Borcherding : "Still a very thin week, though, right?"
Matthew Graham : "AH, certainly the biggest volume spike of the week."
Andrew Horowitz : "MG volume in the 10 year?"
Matthew Graham : "RTRS - US TREASURY - PRIMARY DEALERS TAKE $12.96 BLN OF 10-YEAR NOTES SALE, INDIRECT $9.71 BLN "
Matthew Graham : "RTRS - U.S. 10-YEAR NOTES BID-TO-COVER RATIO 2.49, NON-COMP BIDS $30.64 MLN "
Matthew Graham : "very bad"
Matthew Graham : "RTRS - U.S. SELLS $24 BLN 10-YEAR NOTES AT HIGH YIELD 1.680 PCT, AWARDS 72.94 PCT OF BIDS AT HIGH "
Matthew Graham : "1.654 - 1pm WI"
Matthew Graham : "maybe a little. Auction responses have been underwhelming compared to what they used to be, but I'd say I'm interested to see whether or not this one is interesting."
Andrew Russell : "important auction at 1pm? nailbiter?"
Matthew Graham : "when-issued currently 1.656. Will update at 1pm auction deadline."
Matthew Graham : "2.64 vs 3.53 and 3.29 before that. Big, noticeable differences on average"
Matthew Graham : "in the most recent cycle, it was 2.90 vs 3.06 and 3.61. last cycle, 3.06 vs 3.24 and 3.08."
Matthew Graham : "Today's auction is a "refunding" vs "reopening." Refundings tend to garner LOWER BTC's than reopenings."
Matthew Graham : "VB Report: Last 5 Bid-to-covers: 3.61, 3.06, 2.90, 3.08, 3.24"
Victor Burek : "i havent seen it yet"
Jeff Anderson : "Has the VB Report been issued for the auction yet?"
John Paul Mulchay : "That's why I asked"
Brent Borcherding : "2 weeks ago we 10 yr yielding 1.4, now 1.62....if it isn't a good one we're in REAL trouble."
John Paul Mulchay : "floating most, but locked a stream with +2 to client. It will reduce principal loan and no CC"
Chris Kopec : "I'm as confident as I was on Thursday night."
John Paul Mulchay : "Everybody confident floating into auction?"