MBS RECAP: 9/14/2011

Today had it's fair share of data, but Thursday takes the prize. we have:

- 830am - Consumer Price Index
-830am - Empire State Manufacturing
-830am - Weekly Jobless Claims
-915am - Industrial Production
-1000am- Philly Fed Survey

Pretty much every report in the bunch is an important one, so tomorrow morning is our best chance this week to see how much an impact domestic economic data might have against the backdrop of the ongoing European debt drama. For more details on the data, as well as consensus forecasts, see the following link:

Today has been quite a bit more choppy than recent days. Since 10:23 AM, stocks have gone on a tear with S&P's logging nearly a 30 pt gain (1163 to 1190). We haven't seen much volatility there... more of a steady march upward

But during that time, bond markets had the 30yr auction to digest. That gave longer Treasuries and Production MBS a bit of a boost in the 1 O'Clock hour, but bonds have since weakened back near their worst levels of since about 930am this morning.

-Fannie 3.5's are now unchanged on the day at 101-11
- Fannie 4.0's are 1 tick better at 104-09
- 10yr yields are now 2.3 bps worse on the day at 2.016

10yr yields have been trending up over the past two days whereas MBS have been able to hold on to more of a "sideways" momentum--not a big surprise considering the expectation for MBS to outperform into Treasury weakness, but it makes us nervous just the same. "Sideways" might be a tall order for MBS if 10yr benchmarks were to worsen any more quickly.

For now, the most probably implication is a decreased likelihood of reprices for the better. We don't think reprices for the worse are justified by recent MBS movements, but if 3.5's and 4.0's lost 2-4 more ticks, that could change.

Markets initially did painfully little by way of trading the 30yr bond auction results, despite a strong showing with lower than when-issued yields, and better than average bid-to-cover.

A few more gains have been seen in recent moments, but 30's have been the biggest beneficiary whereas 10's are nearly green on the day now, having moved from just over 2.01 at 1pm to 1.996 currently. This is still not quite the gains we'd expect from such a strong auction.

MBS perked up slightly but haven't been able to break previous highs on the day.

- Fannie 4.0's up 3 ticks to 104-11

- Fannie 3.5's up 1 tick to 101-11

Organically, the price movements aren't enough for reprices for the better, BUT reprices for the better are still a possibility given the passing of a risky event and the resilient ground-holding seen so far today in MBS. A "stability reprice" perhaps...? At least from a few lenders if current MBS prices are held or improved upon.

PLEASE NOTE THOUGH: pipeline control is a factor. This could greatly limit motivations to reprice for the better. Stability and price levels in MBS are looking promising, but please keep individual lender habits in mind.

The last 30yr auction tanked. The outlook for this one is mixed. It could go either way.

On the positive side, the auction that tanked was a refunding whereas this one is a reopening, and reopenings have performed better in general.

On the negative, apart from the aforementioned fact of the last 30yr auction being super ugly, there's also the fact that we haven't gotten an additional meaningful concession heading into the auction. 10's/30's steepeners have been in fashion over the past few days (meaning traders have been selling 10's and buying 30's due to operation twist front-running "leaving out" 30yr bonds as they're not expected to be part of operation Twist), so maybe there's a risk that's been overdone?

who knows really.... As with any auction, it can go either way, so we'll turn to the objective metrics:

- Bid-to-covers have been low for reopenings: 2.33 avg of last 4 vs 2.82 for refundings

- indirect bidding has been 31.7 % for the last 4 reopenings vs 41% for refundings.

- 3 of the last 6 auctions beat their 1pm when-issued trading, but of course the most recent one missed big. To conclude, that last auction was really SO ugly that it greatly muddies the waters in considering how today's might go.

The other auctions this week have been weak in and of themselves, but fairly strong in context (low yields, no maturing debt to reinvest). But perhaps it would be too obvious to expect the same thing to happen today? Or would it?