MBS RECAP: Reprices for Worse Reported

Everything listed in the headline has come into play to varying extents at various times this week. Everything listed is a candidate to drive markets tomorrow. The debt ceiling and debt drama in Europe don't adhere to a release schedule when it comes to their market moving potential. All you can do with those is just know that they're there and both capable of generating pertinent headlines. Then there's the technical picture, which in the short term has seen a choppy but sideways range between 2.95 and 2.87+ dominate the week. That means that a confirmed break of either level could get a little extra "oomph" as the market moves from sideways to directional. But there's no way to measure how much of an impact that might have, just as there's no way to measure the time on the clock that EU or Domestic Debt headlines might hit. Our needs to digest scheduled, forecasted, historically-precedented data will have to be satisfied by economic data alone. To that end, tomorrow offers two reports at 830am: Consumer Prices and the Empire State Manufacturing Survey. Then Industrial Production will come out at 915am followed by Consumer Sentiment at 955am. For a closer look at forecasts and past performances, check out the following link:

Bond markets extended their post auction rally in the 1pm hour after the White House said it was close to an additional $200 billion in spending cuts. Positive MBS price action was short lived though as Republican House Speaker John Boehner quickly responded in a bond bearish tone. Earlier today we said to expect the long-end of the yield curve, which is most influential over mortgage rates, to sell off the most on unfriendly debt ceiling talks. That was indeed the case into the reversal trade this afternoon. Up until now the bond market has generally ignored debt ceiling headlines, so this reaction may just be a one-off event based on trading technicals. Or it could be the start of something new. Bonds are looking technically overbought and the economy has yet to confirm a continued slowdown is in progress, which means there is little new motivation for a sustained break of 2.90% resistance in the 10yr note. Perhaps the market's attention is finally shifting toward domestic politics? Look out....(Business Insider) - Speaker of the House John Boehner (R-OH) said he has "no idea" if the contingency debt limit plan introduced by Sen. Mitch McConnell (R-KY) could pass the House. In a press conference Thursday he said the last ditch effort is "worth keeping on the table." Republicans used the overwhelming majority of their remarks at an afternoon press conference to push for a balanced budget amendment to the Constitution, encouraging Democrats and Obama to support a measure that is by nearly all accounts a non-starter. "We are not going to raise the debt ceiling if we don't have cuts in excess [of the amount on the table], we are not going to raise taxes, and we need a structural solution to keep this from happening again," said House Majority Leader Eric Cantor (R-VA).

With a few minutes left until 3pm, MBS are still near their weaker levels of the day with Fannie 4.0's down 9 ticks on the day at 100-27. Yesterday, levels near these were the best of the day ahead of the 10yr auction, so although we're not quite low enough to be considered back in that range, there is somewhat of a pivoting going on in the high 100's. And that broader sideways behavior is even more clear as 10yr yields keep visiting and revisiting levels in the low to mid 2.9's. Currently 10's look intent on testing 2.95 for the 3pm official close, but so far, have only made it to 2.94. No change to reprice outlook. Negative risk is still out there, but not at levels where a majority of lenders would be affected.

Headlines out of the White House on the debt ceiling debate as well as technical motivations led bond markets to their weakest levels of the day. With Fannie 4.0's at 100-26, reprices for the worse are possible, although if it's the headline that's serving as the primary motivation, then we'd expect some moderation in short order. But we don't know if it will be soon enough to prevent reprices for the worse, so here's your alert! (Caveat: not yet at levels or severity where this would be widespread, so don't panic unless you absolutely have to!)

Today's 30yr Bond Auction was a bit of an underdog. More often than not, the high yields have come in over the 1pm when-issued trading ("when-issued" or WI is effectively the real-time forecast of where markets think high yield will come in. It's marked at 1pm and compared to high yield by way of assessing auction strength). When the high yield is higher than 1pm WI it's referred to as a "tail." When high yield is lower, it's sometimes called a "negative tail," but usually is referred to as having "stopped through," as in the high yield STOPPED ("stopped" in this context derived from the high yield at the time the auction stops, just another word for "came in at") THROUGH to the other side of the WI market. Remember, folks buying these bonds would like highest possible yields, so the auction process is all about whittling those yields down. Once they get past where markets thought they would be (as best indicated by WI), they've then gone 'through.' That brief hole-patcher out of the way, today's auction stopped-through by 1.7 bps--not common at all on cycles where 3's and 10's did well--and furthermore accomplished this with a better than average bid-to-cover ratio than recent averages. Direct bidders once again stepped up in this post Fed-sponsored era, even more so than in the past two auctions. That's a profound commentary on how much domestic markets are seriously concerned about our debt debate.

(Reuters) - The following link contains highlights of Federal Reserve Chairman Ben Bernanke's testimony on Thursday to the Senate Banking Committee as part of his semiannual testimony on the U.S. economy and monetary policy. Bernanke repeated prepared testimony he delivered to a House of Representatives panel on Wednesday.