MBS RECAP: Out Near Best Levels of Day

MBS and TSYs are both benefiting from supportive bounces this afternoon before either of them encroached on the strongest levels from yesterday (read: pivot). But the bullishness brings longer-run considerations to the forefront. 10yr yields down around 3.31 serve to remind us that at no point in 2011 have yields been able to make any sort of sustainable rally beyond that point with the exception of a few days during the Japan Crisis and some brief forays in early January. Similarly, 4.5 MBS are set to close at their 2nd best level since EARLY December! We do not have any recent precedents above current levels. While we do continue to believe that we can see a broader rally through these levels, this isn't a unanimously shared viewpoint in the financial community. So with that being the case and at the absolutely highest levels of the year (within ticks of the best close of the year at 102-28), it's a fantastic time to be lock-biased.

Washington, DC – Federal Housing Finance Agency Acting Director Edward J. DeMarco has directed Fannie Mae and Freddie Mac (the Enterprises) to align their guidelines for servicing delinquent mortgages they own or guarantee. The updated framework will establish uniform servicing requirements as well as monetary incentives for servicers that perform well and penalties for those that do not. “FHFA’s directive to align Enterprise policies for servicing delinquent mortgages should result in earlier servicer engagement to identify the best solution available for homeowners, given their individual circumstances,” DeMarco said. The updated guidelines also address the so-called “dual track” by requiring servicers to contact borrowers as soon as they become delinquent and focus solely on remediating that delinquency. The foreclosure process may not commence if the borrower and servicer are engaged in a goodfaith effort to resolve the delinquency. The servicer must conduct a formal review of each case to ensure a borrower has been considered for foreclosure alternatives before the loan is referred for foreclosure. Even after foreclosure processing begins, financial incentives are provided to encourage servicers to continue to help borrowers pursue a foreclosure alternative.

Yesterday the mid 3.34's clearly emerged as a resistance level which 10yr TSY notes were unable to break. As we often discuss, yesterday's resistance can become today's support (aka: pivot or inflection points). After the fairly ugly 7yr TSY auction sent yields higher this afternoon, this mid 3.34 pivot point is providing clear support. 10yr yields hit their head on the 3.344 ceiling twice and have since moderated back toward their morning highs. We called out 3.325 this morning as a support level, and in exactly the same role reversal mentioned above, 3.325 is now acting as resistance with yields coming from the other side. But all of these movements are rather small and mostly inconsequential as far as the bigger, broader picture is concerned. We'll bring you details on that bigger picture in upcoming commentary posts, but the immediate implication is a reduction in risks of reprices for the worse as the supportive ground-holding seen in benchmarks is allowing MBS to hold above their 102-20 mark. FNCL 4.5's are currently up 6 ticks on the day at 102-21 after getting as low as 102-19.

The 7yr note auction just went off in fairly awful fashion with demand falling short in terms of bid-to-cover and the yield came in substantially higher than the when-issued market that attempts to pace auction results. It is NOT yet certain that current weakness will persist throughout the day, and for now, MBS may even be able to hold supportively ABOVE risk levels but the initial movement was mostly negative for bonds with the 10yr currently at 3.33 and FNCL 4.5's are down 4 ticks since 1pm from 102-24+ to 102-20+. Falling and staying below 102-20 would greatly increase risks of reprices for the worse with the higher likelihoods at 102-18 and under. And while very few lenders may reprice right away, we're sending the alert because there's a risk that 1 or 2 lenders could be jumpy in relation the quickness of the downward spike in MBS. To reiterate, MBS HAVE NOT yet broken what we view as the initial line in the sand for reprice risk at 102-20. However, some lenders have historically repriced in such situations. We'll update you if we hit 102-18.

Today 10:01 - U.S. SELLS $29 BLN 7-YEAR NOTES AT HIGH YIELD 2.712 PCT, AWARDS 22.94 PCT OF BIDS AT HIGH Today 10:01 - U.S. 7-YEAR NOTES BID-TO-COVER RATIO 2.63, NON-COMP BIDS $10.43 MLN Today 10:01 - US TREASURY - PRIMARY DEALERS TAKE $15.37 BLN OF 7-YEAR NOTES SALE, INDIRECT $11.34 BLN

C30 loan pricing is 26.1bps better on average today at the five major lenders. This leaves C30 Best Execution in limbo as the primary market is competitive enough to force some desks into trimming margins to make 4.75% attractive outright, but the buydown is still expensive. Anything to get deals in the door! The back month FNCL 4.5, the MBS coupon lenders base pricing on, is +8/32 at 12-11. This 8 tick price gain matches up perfectly with a 26.1bp improvement in rate sheets, so unless your pricing looks a little light, it's gonna take another 6-8 tick rally in MBS before reprices for the better are awarded.