MBS RECAP: Total Reversal After Treasury Auction

There's some nice support developing just around 3.65 in after hours trading. MBS and treasuries are showing a decent amount of stability and lack of volatility. any remaining lenders who seem like they owe you a reprice for the better have few reasons left to delay it. FNCL 4.5's are at 100-09 still.

We've already seen quite a few reprices for the better following the heroically good 10yr auction. The bond market fought a back and forth battle to hold the improved levels and has been largely successful. Here at the official bond market close, 10's are going out the 3pm door just a hair over 3.64, a full 10bps lower than this morning's highs. FNCL 4.5's are once again getting close to yesterday's PRE-ROLL levels (100-09 currently vs 100-11 yesterday). The downside at the moment is an ongoing FIRM establishment of a 3.63+ resistance level. We haven't been any lower in 10yr notes since NFP.

More and more reprices for the better have been rolling in as both treasuries and MBS continue to push near the more positive end of their post-auction range. 10yr yields are at 3.653 after struggling to get lower than 3.69 yesterday afternoon and this morning. A small intraday triangle has broken bullishly in both treasuries and MBS. FNCL 4.5's are up 8 ticks on the day at 100-08.

So far, the immediate post-rally yield lows in the 10yr have been the lowest we've seen. This is a testament to how much "built-in" resistance the bond market is fighting with at this particular time in history. Given the amount by which the auction's high yield came in lower than when-issued yields (negative "tail"), the huge uptick in indirect bids after they were cited as a reason to trade yesterday's auction negatively, and last but not least, the strong 3.23 bid to cover, in any other market, we'd be shocked and even indignant that 10's bounced on firm resistance at yesterday's pre auction yields. But these are our 40 years in the desert, and thus 10's are fighting to hold SUPPORT now at 3.666 and 3.68+ levels, currently between the two at 3.671. On the bullish side, 3.635 is the lowest pre-auction yield from yesterday and the lowest post-auction yield today. That's the bullish resistance target we'd hope to get back to if support holds. MBS don't seem to be fans of the indecision. Back to being only 7 ticks up on the day in FNCL 4.5's at 100-06. Still.... Green is green and several lenders have repriced for the better. It's just that the extent of those reprices and the number of lenders who participate in them may be limited.

10yr notes are currently up 24 ticks in price and down almost 10bps in yield at 3.6424. This was THROUGH SCREENS 4 and a half bps! (auction high yield lower than WI = "through"). Last time we traded through that big was 7/09. MBS FNCL 4.5's are up 10 ticks on the day now at 100-10. Expect reprices for the better.

SELLS $24 BLN 10-YEAR NOTES AT HIGH YIELD 3.665 PCT, AWARDS 58.81 PCT OF BIDS AT HIGH *** U.S. 10-YEAR NOTES BID-TO-COVER RATIO 3.23, NON-COMP BIDS $144.00 MLN *** US TREASURY - PRIMARY DEALERS TAKE $6.73 BLN OF 10-YEAR NOTES SALE, INDIRECT $17.01 BLN

As opposed to the normal pre-auction selling (concession), we're instead RALLYING as 1pm approaches. It's not likely that many lenders would reprice for the better on these gains, but the chances of that vastly improve if they hold here or higher after the auction. FNCL 4.5's are at 100-03 and 10yr yields are at 3.703. In the when-issued market, 10's are currently at 3.7130.

10yr notes were drifting higher starting at 10:15, but were able to find a ceiling right at yesterday's weakest levels. They've since moderated and are currently in the 3.71's with an hour to go until the auction. MBS translated this benchmark bounce into a reversal of their own at 99-27 in FNCL 4.5's and made it back up to par.

(Reuters Highlights) - BERNANKE ON GSE REFORM: "As you know, the Treasury is promising us a set of proposals very soon. It'll be interesting to see what they provide. There's various possibilities that we could do, including making them a government utility or privatizing them, which would be two alternatives. One suggestion which I have made in previous remarks is that if the government is involved in providing credit guarantees, they should do so only as a deep backstop -- that is, the first losses should be borne by the originators of the mortgages or by the securitizers. The government, if it does provide backstop insurance, should do so for an actuarially fair fee, premium, and that would essentially allow the government to provide backstop in situations like we had in the last few years where the housing market comes under enormous stress."

REPRICES FOR THE WORSE HAVE BEEN REPORTED after production MBS coupons fell to new 10 month lows just a few moments ago. Although stocks have pulled a total reversal and are now 0.50% in the red, TSY short covering was not sustained in the bond market and traders are now actively seeking a pre-auction price concession before Treasury sells $24 billion 10 year notes. This began right after the Fed completed their usual QEII operations.

Since 10:15am, MBS have fallen 7 ticks from a 100-10 peak, now down to 100-03. It really depends on how edgy lenders are ahead of the 1pm auction, but this could be enough of a loss to see a reprice for the worse, although we haven't seen any yet. The underlying trend in 10yr notes is disturbing, but not unexpected (auction concession). 10's just broke through some implied support from a recent bounce at 3.725. Not good. If this weakness persists, reprices for the worse will become increasingly likely.