MBS MORNING: Approaching the Lows of the Day Ahead of Auction

As the session has progressed, stocks have meandered higher and the benchmark rates market has consistently weakened as traders gladly welcomed the opportunity to build in concessions before the 1pm 7 yr note auction.

Currently the 10yr TSY note is trading near the high yields of the day at 3.494%. Looking at the yield chart below you can see the market's pre-data range widening as rates back up, once the 830 data was released the 10yr yield shot higher,  successfully breaking through the upper limits of the trend channel. Soon after, rates corrected as short positions were covered, which pushed yields back into the trend channel. However, rates found it quite accommodating that were stocks continuing to push higher throughout the morning, thus creating the chance to bake in a few extra bps of return before the 1pm auction. At the moment, the 10yr is again testing the upper limits of the trend channel...the 3.50 level is a bit more supportive than 3.46 though.

Looking at the above events unfold in TSY futures, the below chart shows the bond market's negative reaction to 830 data and the lack of buying interest that ensued afterward.  Lower highs and lower lows as corrective momentum FAILED to accumulate on several attempts. Again, no reason to buy into the auction, so let yields rise. AUCTION CONCESSION. The above upward yield channel is a function of traders allowing rates to set lower price highs and lower price lows. I

MBS prices have fallen as a result of the bond market's bias to let yields rise ahead of the auction. The FN 4.0 is trading -0-11 at 98-09 yielding 4.171% and the FN 4.5 is -0-09 at 100-28 yielding 4.395%. The secondary market current coupon is 4.339%.

It should however be noted that "rate sheet influential" yield spreads are tighter vs. TSYs into the sell off today, albeit off the tights of the day.  So MBS are not performing as poorly as their benchmark big brothers. This is a function of light production supply and the Fed's constant "balancing" efforts. We would expect total return type accounts to be sellers as yield spreads grind tighter against swaps and TSYs, which may be the reason for a little "leaking out" of yield spreads.

Either way, rate sheet influential prices are approaching the lows of the day heading into the auction. BEWARE.SOME AGGRESSIVE PRICE LEADER TYPE LENDERS MAY REPRICE FOR THE WORSE

 NEXT EVENT: $31 BILLION 7s at 1pm. Below are the auction results for 7yr note auctions since the issue was reopened in February.

PS...The Fed completed its last coupon lift in the Treasury market this morning. The Fed bought $1.94bn vs $10.98 bln tendered. BYE BYE Fed TSY purchase program.