MBS RECAP: Ugly Price Action

830am Jobless Claims is the only piece of scheduled economic data tomorrow, but not the only market-moving event. 1pm brings the conclusion of this week's Treasury Note Auctions with 7yr tenors. But auctions seem to be carrying less importance than usual. Markets backed the 5yr note down to a historically low yield at today's auction, and it was taken down relatively easily, with statistics in line with historical averages. There's little doubt that domestic and foreign demand for our sovereign debt is healthy. The bigger doubts revolve around how the market chooses to interpret Bernanke's Jackson Hole confab on Friday. To revisit MND's "Week Ahead" which contains economists forecasts for tomorrow's claims as well as further discussion on Jackson Hole, click the following link:

(Reuters) - Whether the Federal Reserve likes it or not, its unprecedented monetary polices over the last few years have conditioned the financial markets to expect a helping hand when the going gets tough. That's why all eyes will be on Ben Bernanke, the central bank's chairman, when he speaks Friday at the Fed's annual symposium in Jackson Hole, Wyoming. With the stock market mired in a month-long slump and both the U.S. and euro zone economies in danger of sliding into recession, investors are bracing for a possible repeat of last year's performance, when Bernanke hinted the Fed would act if conditions deteriorated. Two months later, the central bank began pumping $600 billion into the financial system through direct purchases of Treasury debt, a second round of stimulus that markets dubbed "QE2." While the jury's still out on how effective these purchases have been, few are ready to rule out QE3 entirely. Following is a look at what the Fed could do.

Bleeding starting again... Stock lever is in full effect as a late uptick in stocks is driving TSY yields higher and MBS are along for the ride. 10's are up to 2.278 now and Fannie 4.0 MBS are down almost half a point on the day at 103-09. Reprices for the worse are still a threat, especially if you haven't see one yet.

First of all, reprices for the worse are still ongoing, but in the sense that MBS prices seem to be recovering, the bleeding seems to be stopping for now. Things got pretty ugly, with 4.0's down to 103-10 at one point, but are now back to 103-16, right about where they were on the first leg down after the auction. 10yr notes backed up to an internal trendline that was passing through 2.257. We put a chart of that up when it was first being tested and now that same link contains an updated version of the chart showing the ongoing technical significance of that level. Here's the link again. Pretty interesting turn of events for the good ol' crystal ball, but it's purely coincidental. The important thing is that the market continues to trade technically and MBS watchers can perhaps breathe a bit easier into the afternoon with respect to the risk of accelerating losses.

Today's 5 year Note auction came in with surprisingly average results across the board. The high yield stopped effectively on the screws with the when-issued yield, the bid-to-cover was a bit weaker than average but close enough considering the heady levels, and the %'s taken by dealers/directs/indirects were all close to recent averages. Given the sell-off leading into the auction, these average results are not the greatest thing that could have happened to bond markets today and MBS/TSY's are acting accordingly. 10yr yields are up to 2.246 and Fannie 4.0's are down 10 ticks on the day now to 103-14. Definite reprice for the worse material. We're hoping for 10's to hold onto an internal trendline tracing back to the beginning of the month that's currently passing through 2.257 today. That's on an hourly chart, so a bit of testing higher is possible. The dark-horse is the stock market. Not rallying right now, and if stocks slide into the afternoon, it could easily keep a lid on bond market losses. (vice versa though... if stocks break higher, it could exacerbate an already negative situation).

This alert takes the previous negative reprice outlook back to neutral. After consolidating around 2.17 earlier, 10yr TSY yields are repeating similar patterns around 2.20. They've ostensibly been able to hold their ground there due to S&P's bouncing lower after breaking 1170. There's an incredibly clearly delineated pivot point at 1171 which marked a supportive bounce on 8/5 and a resistant ceiling on 8/9. Perhaps some technical resistance there. MBS couldn't be much happier about benchmarks holding their ground there. Fannie 4.0's are actually back in the green, up 1 tick to 103-24 and 3.5's are up 3 ticks to 100-29. These gains likely haven't been held long enough to justify reprices for the better, but if they are maintained or improved upon, it will soon be possible among lenders who were out with pricing near 10am.