MBS MID-DAY: 10/21/2011

As stocks soar into the highest territory since early August (as indicated by the S&P at 1236.39), MBS and Treasuries are on the run.

- Fannie 3.5's are down 1 tick to 100-31
- Fannie 4.0's are up 2 ticks at 103-08
- 10yr yields are up 4 bps at 2.226

That's about a 7 ticks loss for Fannie 3.5's since this morning's highs. If you had rates early, a negative reprice isn't out of the question, but "bouncing" remains a possibility if you know you can afford to wait based on a particular lender's habits.

Since October 3rd, the Fed has reinvested $15 bln in the MBS market. That's been enough to take down a majority of the origination during that time and the Fed is clearly the big buyer when it comes to 3.5's, with Fannie and Freddie 3.5's accounting for nearly two times as many purchases as 4.0's. Here's the breakdown:

- 2.75 bln Freddie 3.5s vs 1.85 bln 4.0s
- 4.00 bln Fannie 3.5's vs 2.6 bln 4.0's
- 1.3 bln Ginnie 3.5's vs 750 mln 4.0's

There's a smattering of activity in Fannie and Freddie 15 year space accounting for the rest.

After what was probably the quietest and lowest volume overnight session of the week, MBS have moved a few ticks up from a flat open and Treasuries are within 1 bp of unchanged in the 10yr vs 5pm levels. Keep in mind that 5pm levels were near the lows of the day for both. Here's a run-down of levels

- Fannie 3.5's up 5 ticks at 101-05
- Fannie 4.0's up 4 ticks at 103-10
- Ginnie 3.5's up 5 ticks at 103-02
- 10yr yields up half a bp at 2.1924

With no data on tap, and only a few Fed Speakers, the most interesting news on the MBS table this morning are the several angles approaching the possibility of renewed Fed purchases in MBS, not the least of which came from the Fed's own Tarullo last night, followed up by WSJ's Hilsenrath this morning. Nothing other than speculation at this point, but with a fed official discussing it and an op-ed writer who is generally thought to be in tune with the street and Fed policy writing a piece on it, it's at least something to consider.

But the interesting possibility for the mortgage world don't end there. 60 vs 38 senators voted late yesterday to extend loan limits for two more years. Nothing heard about prospects for the House, but we wouldn't start calling those $729k loan amount borrowers just quite yet...

What we can do is anticipate improved rate sheets this morning if current levels hold in MBS, but don't rule out the possibility of volatility later in the session. Liquidity and volume will probably taper off after 12 noon, exaggerating moves, and markets remain intentionally susceptible to the slightest hiccup of a headline from Europe.