MBS RECAP: Reprices Reported

Durable Goods Orders will be the lone wolf in tomorrow morning's top-tier scheduled economic data line up. That takes place at 830am, but the normal Wednesday morning MBA Mortgage Apps is "with-you-as-always" at 7am. Beyond that, the 'remains of the day' aren't nearly as boring as the movie--not to market watchers anyway. Chalk that up to the 1pm 5yr Note auction--a more pertinent maturity to the mortgage world, and a more challenging issuance on debt-debate week--as well as the 2pm release of the Beige Book (not always a huge market mover, but not something to be glossed over either). If data and events don't do the trick, there's always the potential for ongoing headline risk from the debt-ceiling and Eurozone. For a closer look at events from from tomorrow and the entire week, check the following link:

At the 3pm close and into the first minutes of after-hours trading, MBS are at their highs of the day. That marks a 3/8ths of a point improvement in Fannie 4.0's (12 ticks) to 100-23. Treasuries are performing similarly well to slightly better in 5's, 7's, and 10's. Anything else is lagging a bit. But 10yr notes are 5.66 bps lower today currently at 2.9474. If you haven't seen a reprice for the better, it's still possible. And any short term deals should consider it given the recent volatility.

(Reuters) - Americans are overwhelmingly concerned about the U.S. debt crisis and a majority back the type of compromise pushed by President Barack Obama to end the impasse, a Reuters/Ipsos poll found on Tuesday. Fifty-six percent of people said lawmakers and Obama should agree to a combination of both tax hikes and cuts to government programs to end deadlock in debt talks. Obama and Republicans are at odds over how to put America's fiscal house in order. Obama prefers a mix of spending cuts and tax increases to reduce the deficit, while Republicans back deep spending cuts alone and no increase in taxes. Eighty-three percent of people polled said they were concerned about the failure of debt talks so far and 54 percent said they were very concerned. Blame for the debt impasse is fairly evenly distributed, with 31 percent holding Republican lawmakers responsible, 21 percent blaming Obama, and 9 percent blaming Democratic lawmakers. (Reporting by Steve Holland and Alistair Bell; Editing by Jackie Frank)

While the results of today's 2yr Note auction are not especially strong in and of themselves, in the current context, things look a bit better, and bond markets are starting to realize that. The ingredients of that "context" include the ongoing debt ceiling debate, the fact that current 2yr yields are near record lows (the auction stopped less than 2 bps from record low), auctions' recent tendency to stop HIGHER than "when-issued" trading ("when issued" or WI can be thought of as the running estimate of where markets believe the auction will come in), and a recent tendency toward lower bid-to-cover ratios. If we assume that short maturity btc's tend to rise late in the year, we see that today's btc is pretty much in line with 2011 averages. But the important part here is not how good or bad the auction was, but rather, how markets are responding. And just as there are several mitigating factors in assessing the auction's strength, so too have MBS and Treasuries expressed some indecision at first. But the indecision has given way to small gains, with Fannie 4.0 MBS up a few ticks since the auction at 100-22. 10yr notes bounced several times off an intraday pivot point and moved about a bp lower in yield to 2.955. There's still lots of resistance to further bond market gains, but the fact that MBS and Treasuries haven't shown any inclination towards rapid sell-offs today is a friend to rate sheets. Several lenders have repriced for the better and given the post-auction trade we're witnessing, more will follow if things stay near these levels.

Earlier this morning, stock prices and bond yields had been keeping pace with each other very well. But now, despite a bounce back in stocks, Treasury yields are falling and MBS prices are up to their best levels of the day. In Fannie 4.0's, that's 100-21. But there's resistance here, both for MBS and Treasuries. For MBS, this is the upper end of the channel they've been in for a few weeks. Tough to break out without a supportive auction or a bond-friendly headline. Technical resistance also indicated in 10yr notes where several different trendlines pass through this zone between 2.95 and 2.96. The ambiguity of which trend is dominant means that there's no one specific line in the sand, but rather we'd need to be well past 2.95 and with volume to consider that the trend could be shifting for the better. But for now, with MBS at the highs of the day, reprices for the better aren't out of the question from that very small minority that occasionally reprices ahead of the rest of the pack. Reprices for the better aren't usually likely before a TSY auction, and neither are they now, but if there's a chance, it's for improvements.