MBS RECAP: 1/21/2011

10yr yields decidedly into 3.41's now and MBS are happy about that. But this is more like the happiness that comes from the passing of a risky situation and thus MBS are thus far limiting their gains to a 102-04 FNCL 4.5. This is plenty for the previously mentioned lenders who had not yet repriced to get in the game now as well as small encore performances from lenders who only repriced marginally better this morning.

10yr notes have gone no higher than 3.44 and continue to nudge resistance at 3.42. The narrowness of that range has been salubrious for lender reprices so far today and we'd continue to reiterate that point. Any remaining lenders who have not repriced for the better are more and more likely to do so the longer 102-00 holds supportively in FNCL 4.5's. You might even see one of the early repricers who only gave an eighth or so come back for a second pass.

It's getting a bit old at this point in the day, but testing of 3.42 resistance is an ongoing phenomenon. 10yr yields made their most serious recent attempt at 3.42 moments ago and MBS hitched a ride up to 102-02 but have since fallen back to 102-00 in FNCL 4.5's as the resistance held firm. Still... We were hopeful that a narrow trading range would continue to benefit MBS, and this has proven true. Little else to report other than the continuation of the narrow sideways trend.

Decreased Volatility in benchmarks is helping MBS hold a stable trend around 102-00 in FNCL 4.5's. This has led to several lenders repricing for the better, and that could continue to be the case as long as fluctuations in price remain minimal.. That said, the best opportunities for MBS gains are more likely to coincide with a 10yr treasury note that breaks under 3.42, a feat that has so far eluded 10's today.

After 10yr yields most recent failure at 3.42, support was not far behind, coming in at 3.44. Although 3.42 is certainly not broken yet, this is precisely the NARROWING OF THE TRADING RANGE we anticipated would be necessary for potential reprices for the better. We've heard of one major bank out with a minor reprice so far, and more may follow, either if the range stays narrow and relatively flat, or if bonds can take it a step further and actually make some gains from here. FNCL 4.5's are at 102-00.

The latest MBS Commentary (linked below) shows the 3.42 pivot point in 10yr yields. After seeing this level serve as the outer limit for the previous section of the range that contained the last few weeks of trading, seeing it break, and then seeing yields fall twice this morning to retest, only to meet resistance, it's an uncomfortable first step in the confirmation of the shift we feared yesterday. "Confirmation" in and of itself doesn't mean bonds can't shift right back to the other end of the range, but it at least suggests that 3.42 is an important battle for yields.

Although trading volume remains relatively low, the benchmark 10 year TSY note is off session yield highs and MBS prices are off their lows. The source of this bounce is short covering (profit taking) in the futures market in unison with a down draft in equities, which have cut intraday gains in half on profit taking. Production MBS coupons are now in the green but benchmark 10s have yet to break 3.42% resistance. If 10s break through this inflection level, reprices for the better will be more likely.