MBS RECAP: 9/27/2011

Today it was Consumer Confidence that failed to inspire much market movement in the face of numerous other factors. Tomorrow, Durable Goods will try for the same thing.

The other players in this drama continue to be developments out of the EU, the quarter-end position squaring in underlying markets, and of course the 1pm auction of 5yr Treasury notes.

Bernanke will also speak at 5pm, but that's more of a market mover for Thursday as opposed to tomorrow. Even so, we think the focus is largely on that we cannot see. Accounts are working behind the scenes to reallocate portfolios for the coming quarter as well as square up positions ahead of the end end of Q3.

That's the kind of stuff that doesn't make for very good headline news on CNBC. So don't be surprised if you continue to hear about Europe et. al. It's not that those things aren't moving markets too, just that there are big, behind-the-scenes movers right now, and they should be out of the picture by next week.

It's a sad state of affairs that we might see some reprices for the worse this afternoon. Given the timing, you might think this would have something to do with the 2yr note auction... It doesn't.

Markets are simply leaking lower in apathetic trading. Not much at all was done with the 2yr auction and MBS originators have been aggressively dumping supply on the secondary all day. 10yr yields just broke appreciably north of 2.00 and MBS have plenty of room to follow that negativity.

Keep in mind, the MBS market is maintaining a good relative degree of health versus Treasuries right now, so it's more a matter of whether or not Treasuries can bounce back. While tactical considerations may lean more towards a panic lock, strategically, we'd want to see 10's over 2.06 before we'd start entertaining a broader shift.

Fannie 3.5's are currently 18 ticks lower on the day at 102-02.

From June 2010 to February 2011, every single 2yr note auction stopped at a lower yield than the market was expecting (as measured by 1pm when-issued yields). That was largely an effect of the what hindsight now shows us as "writing on the wall."

Up until that June auction in 2010, 2's had been super sideways since late 2008, not dipping below .65 at all. The writing seemed to have been on the wall when yields started moving lower into the late 2010 bond market rally.

Things have been more mixed for most of 2011 though, with half of the last 6 auctions being better than expected. Here are some other stats:

- Bid-to-Cover averages 3.28 for the last 4 (last auction: 3.44)
- Last auction's high yield was 0.22%
- Indirects have averaged 28.2%

Other considerations include :

- how will markets approach this auction given that a large seller looms (the Fed via the "operation twist" announcement?) - How will that be balanced against the 2013 verbiage in FOMC statements that has done so much to "fix" the short end of the curve at low levels?

The answers seem to be something that markets are waiting for as opposed to something about which conclusions have already been drawn.