MBS RECAP: 1/20/2011

The volume spike following the tips auction was immense. 1pm - 130pm was the highest volume of any 30 minute period today. 10yr contracts approached the 200k mark. By contrast, the last 30 minutes have seen less than 20k. The volume came in 2 forms earlier: that which brought 10yr yields UP to 3.46, and that which fought back to draw a line in the sand there. Everything since then can't really speak much to market sentiment given the volume with which it speaks. Bottom line: from one half of the range DECIDEDLY into the middle of the other half. If anything though, bonds have continued to be stable. 4.5's are at 101-29.

Sideways slide continuing through the official 3pm close. 10yr notes went out at 3.4586 and FNCL 4.5's at 101-28+. The S&P is currently at 1281, near yesterday's closing levels, after falling as far as 1271 this morning. The yield curve moved steeper after TIPS (up to 284.7 bps), but has since backed down to 282.2 bps. Overall, still much steeper on the day, (opened at 277 bps)

When you see an outlying trade like this, cross check the move with other MBS and more importantly, treasuries. If the rest of the market does not contain similar spikes, chances are you're dealing with an outlying trade distorting the chart during an illiquid time of day.

Volume is dying down once again as the 3pm close approaches and after more than a week in the lower half of the range, it's no surprise to see selling pressure meet support near the center of the upper half of the range (roughly 3.3 to 3.5). This should ease any lingering threats of reprices for the worse (but if a particular lender did not reprice at all yet today, it's still a possibility.

Immediately following the TIPS auction as treasuries sold fairly aggressively, MBS initially held over 102-00, which would not have been justification for reprices for the worse. But FNCL's have since capitulated to the sell-off, now down to 101-27. Quick -to-Act lenders are coming in with reprices now, and with prices under 102-00, we'd expect more to follow. Also important to note is that this is no longer a late-day/low-volume phenomenon that can be easily ignored. The TIPS auction blind-sided the market and with volume spiking to it's highest 20 minute total of the day, this is confirmation of a shift back into the upper part of the 3.3 to 3.5 range.

2.37 BTC and a large tail on the normally-not-so-important-to-MBS-Benchmarks TIPS auction was far enough away from recent averages near 2.70 to prompt a move above 3.42 in 10's. MBS have yet to move down to 102-00 and stand a good chance to lose at a slower pace than treasuries at the moment, but the pressure is on to some extent. Dealers are currently forced to adjust bond prices lower to attract buyers during a week that has already seen a ton of new corporate supply come to the market. The most mature phase of these post-TIPS-auction effects could be reprices for the worse, but purely in FNCL 4.5's, those moves would not yet be justified.

The 10 minute moving average volume in 10yr futures contracts is down under 10k contracts now, versus morning highs over 30k contracts. The biggest volume spikes coincide with treasury futures prices that support the 3.42 yield in 10's. In addition, there is a series of successive "lower highs" in 10yr yields leading down from the initial 3.424 high just after 10AM. FNCL 4.5's are slightly stronger in recent minutes, moving up 2 ticks to 102-04.

Stocks seem to have found a floor at seven session lows. S&Ps are currently -7.25 at 1271.25, almost 4 handles above the intraday low of 1267.50. As stock selling has slowed, pressure has picked up on rates to move higher. Benchmark 10s are approaching another test of 3.42% support. If 10s do break 3.42% and FNCL 4.5s trend lower through 102-00, reprices for the worse will be more likely. The CC is lower and wider vs. the curve, suggesting focused selling in "rate sheet influential" MBS coupons.

With 10's meeting resistance as they try to get back under 3.40 and MBS resisting a move over 102-04 in FNCL 4.5's, here are some thoughts from the most recent blog post on reprice risk: Calling reprices gets a little tricky here as some lenders were a little slow to price this AM while others published at their usual time. The earlier your lender priced...the higher the risk of reprices for the worse. If FNCL 4.5s fall below 102-00 reprices will be more likely across the board. The odds of this happening grow greatly if 10s break through 3.42% support.