MBS RECAP: 2/8/2011

10yr Yields touched as high as 3.74 and FNCL 4.5's lost 6-7 ticks int he blink of an eye to result in 100-12 lows. We're now seeing many lenders reprice for the worse AGAIN.

After showing some indecision between 100-22 and 100-22, FNCL 4.5's have fallen to 100-18, their lowest levels of the day. Likewise, 10yr note yields are at their highest point of the day, just under 3.72. This ramps up an already pervasive risk of reprices for the worse, certainly among lenders who haven't put them out already and even for a second round from lenders who have.

3.70 in 10yr yields lines up with 100-20 in FNCL 4.5's. Both of these levels have hosted recent "double bounces" in the bond market. That's a good thing in the sense that it has shown some support underfoot for what had been rapidly falling bond prices, but both now face resistance if they want to avoid future encounters with these weakest levels of the day. The initial hesitation seen in 10yr yields following the 1pm auction was around 3.685. When we see this kind of POTENTIAL bounce form, it suggests that the same level could also cause a bounce if yields happen to approach it from the other direction in the future. And that's indeed the case as 3.685 noticeably thwarted the first attempt to rally. The coinciding level in FNCL 4.5s is at 100-22. Prices are essentially like a baseball player stuck in a hotbox between first and second (100-20 and 100-22). Risks remain elevated for reprices for the worse.

(Reuters) - Dallas Federal Reserve Bank President Richard Fisher, last year a vocal critic of the Fed's $600 billion bond-buying program, said on Tuesday he would oppose further Fed easing and would move aggressively to trim the central bank's bond holdings should inflation emerge. The Fed in November embarked on a second round of Treasury purchases to boost a faltering economy. Since then the economy has shown signs of strengthening, and prices of some commodities have risen, raising fears of a broader increase in prices that could hurt the economy. In January, Fisher voted with the rest of the Fed's policy-setting Federal Open Market Committee to continue that stimulus. But the Dallas Fed president on Tuesday signaled he may withdraw that support. "I would be very wary of expanding our balance sheet further; indeed, given current economic and financial conditions, it is hard for me to envision a scenario where I would not use my voting position this year to formally dissent should the FOMC recommend another tranche of monetary accommodation," he said in remarks prepared for delivery to a business group here. "And I expect I will be at the forefront of the effort to trim back our Treasury holdings and tighten policy at the earliest sign that inflationary pressures are moving beyond the commodity markets and into the general price stream." Fed Chairman Ben Bernanke last week acknowledged a rosier economic outlook but suggested the recovery was still fragile enough to merit continued support from super-easy monetary policy. (

Reuters) - U.S. inflation is still below the central bank's comfort levels and price rises for individual goods or services does not signal broader price pressures are around the corner, a top Federal Reserve policymaker said on Tuesday. Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said the central bank cannot address rises in the cost of living, but needs to ensure prices overall remain stable. "For the moment, inflation, properly defined, is tame, in my view. And the rise of individual prices does not signal incipient inflation," Lockhart told the Calhoun County Chamber of Commerce. "Underlying inflation is currently below the level that I would define as price stability," he said. Lockhart said he expects core inflation to rise gradually, to within the Fed's informal 2 percent target range by 2013. Some analysts have blamed the Fed's easy money policy for flooding the global economy with money and helping to drive prices for food and other commodities higher. While headline inflation has picked up in the United States, core inflation has held near a five-decade low. Lockhart drew a clear distinction between inflation -- which affects all prices -- and increases in the cost of living due to rises in individual prices. "The Fed, like every other central bank, is powerless to prevent fluctuations in the cost of living and increases of individual prices. We do not produce oil. Nor do we grow food or provide health care," he said.

(Reuters) – BlackRock Inc, the world’s largest money manager, plans to approve 10 lenders this month to feed its program to expand residential mortgage credit beyond the U.S. government market, said Randy Robertson, managing director and co-head of securitized products. One lender is already considering “jumbo” loan applications under BlackRock’s program geared toward such “non-conforming” mortgages that don’t qualify for federal guarantees, he said. Restoring the flow of private capital to the $11 trillion U.S. mortgage market is fueling the buzz at the conference of the American Securitization Forum, a lobbying group for the industry whose funds once provided the lion’s share of money for home buyers. Private capital has been thin since 2008 due to housing market uncertainty, increased regulation and competition from government-backed programs. A push to reduce government support of the mortgage market is growing as Congress and the Obama administration work to reform the system. They want to protect taxpayers who have shelled out some $150 billion to cover losses at U.S. funding giants Fannie Mae and Freddie Mac. The administration is considering a cut in government support for the mortgage market. BlackRock’s capital and infrastructure will be ready when mortgage demand rises, Robertson said in an interview on Monday.

Treasury just auctioned $32 billion 3-year notes. The bid to cover ratio was a below average 3.01 bids submitted for every 1 accepted by Treasury. Dealers seemed to be extra aggressive in their bidding but that is not a good thing as it implies forced buying. Indirect accounts were noticeably weak with a below average 27.6% award. Direct bidders were the least willing participate as noted by a $4bn decline in their total bids and 7% smaller auction award. Generally weak demand for this issue has made it easy for traders to begin preparing for tomorrow's 10 year Treasury note auction. Benchmark Yields are moving higher and MBS prices are once again approaching reprice for the worse territory. BEWARE

The 10yr note has moved up to 3.68 territory after trading around 3.65 before the auction. FNCL 4.5's have fallen to their weakest levels of the day at 100-23 making reprices for the worse possible, if not likely.

***$32 BLN 3-YEAR NOTES AT HIGH YIELD 1.349 PCT, AWARDS 23.20 PCT OF BIDS AT HIGH *** 3-YEAR NOTES BID-TO-COVER RATIO 3.01, NON-COMP BIDS $66.36 MLN *** PRIMARY DEALERS TAKE $19.89 BLN OF 3-YEAR NOTES SALE, INDIRECT $8.81 BLN

After a slow morning that generally left "rate sheet influential" MBS coupons without willing buyers, we've seen a modest bounce in speculative demand which has helped production MBS coupon prices bounce off support and return to the middle of the early session range at 100-28. The risk of reprices for the worse has faded for now. NEXT EVENT: $32 billion 3 year TSY notes to be auctioned at 1pm. WI currently bid at 1.343% vs. cash market 1.289%.

Production MBS coupon prices have fallen to new intraday lows but are managing to stay above key support levels that if broken would likely trigger reprices for the worse. This is NOT a reprice alert but is intended to provide forward looking guidance that directional momentum is leaning modestly in favor of lower MBS prices and reprices for the worse. Be on the defensive if you are preparing a lock request.