MBS RECAP: 1/25/2011

After 1pm, 10yr notes rallied nearly 8bps by 2pm. Since then yields have consolidated into a narrow range around 3.32 where they recently crossed the 3pm official closing mark. The narrow range has calmly continued sideways so far in the after hours session, and it's the same for MBS. FNCL 4.5's rose to 102-12 at their best, from previous lows under 102-00. They're currently at 102-10 and haven't moved much. Reprices for the better have been widespread but the change in pricing hasn't been aggressive in general. High risk events on the horizon likely contribute to that caution.

The trend channel we'd previously been tracking in 10's is decidedly broken bullishly and we've adjusted the channel to line up with recent lows at 3.3089 and the highs from 1/18. This trendline shares it's parallel support line with recent highs. 10's have retraced a bp or two since hitting those lows, but there's no doubt about the overall bullishness today (not unabashed bullishness since a portion of the positivity is short-covering driven). MBS FNCL 4.5's crept up to 102-12, but like benchmarks, also retraced a bit and are now back at previously reported levels at 102-10. This has been enough positivity to see some lenders repricing for the better a second time, and a vast majority have done so at least once, or soon will.

at 3.3322, 10yr yields continue to operate at the very lowest limits of a trend channel that began on 1/20. Highs from 1/20 line up with today's lows for the resistance line and parallel to that is the support trend with touches on the 21st and earlier this morning. Even if this trend channel breaks resistance here, we're still operating in a horizontal range that includes a pivot point at current levels established by 1/19 lows. Below that even, there's still horizontal resistance in the high 3.25's. FNCL 4.5's are up 8 ticks on the day at 102-10 making reprices for the better likely.

After a relatively uneventful 2yr note auction markets moved mostly sideways for the first 10-12 minutes, but just before 1:15 pm, 10's shot down rather abruptly into the 3.35's while FNCL 4.5's rallied to 102-04. If these levels are maintained, additional lenders may reprice for the better.

U.S. SELLS $35 BLN 2-YEAR NOTES AT HIGH YIELD 0.650 PCT, AWARDS 26.64 PCT OF BIDS AT HIGH /// U.S. 2-YEAR NOTES BID-TO-COVER RATIO 3.47, NON-COMP BIDS $306.29 MLN // US TREASURY - PRIMARY DEALERS TAKE $20.17 BLN OF 2-YEAR NOTES SALE, INDIRECT $9.36 BLN

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30 minutes to go now before the 2yr note auction at 1pm. After rallying from 3.42 to the high 3.37's, 10yr notes have held onto that territory while MBS have reached a similar ledge at 102-03. In the grand scheme of the week, the impact of today's 2yr auction is limited, but it does stand the chance to create some movement away from recent levels, should they hold relatively flat into the auction.

10yr yields met support twice this morning just under 3.42. With the exception of early morning hours, yesterday's high yields were also just under 3.42 making this our most near term support level. After that 2nd support bounce, 10's are now down into the mid 3.38's while FNCL 4.5's rose above 102-01 for the first time since this morning's sell-off. Risks of reprices for the worse will continue to abate the longer FNCL 4.5's hold above 102-00. The upcoming 2yr note auction in just over an hour is the next potential market mover to note.

Although traders were quick to book a profit and sell short the 10 year note after a much stronger than expected read on Consumer Confidence, the mid-range pivot at 3.40% is providing support in benchmarks. Unfortunately the 5bp turn around has pressured production MBS coupon prices lower and reprices have been reported.