EFSF Sell-Off: The Morning After. MBS Back at Yesterday's Highs

"Those with the will to come into work today will at least be greeted by a modicum of relief for bond markets. But the key point is this: after more than a year of drama surrounding an impending Greek default, markets now must account for the possibility that there IS NO Greek default (despite the debate over the 50% haircut still constituting a default and the lack of clarity as to CDS Payouts). 

There's also a glut of headlines this AM that generally combine to suggest a theme of "more questions than answers" remaining after yesterday's EU Summit and subsequent bond market sell-off (if a killer rally is a "face-melter" shall we call yesterday a "face-freezer?"). Bottom line there is to expect a major Round 2 of hullabaloo as EU leaders and markets alike sort through the operational details of what currently can best be described as "good start" in addressing the EU crisis.

In the meantime, MBS are like the opportunistic foraging mammals that sought their fortunes after the extinction of the dinosaurs, poking our heads out from behind rocks and caves this morning as we survey the scene of this brave new world--at least the "extinction" theme remains until 10's are back below 2.29. The point is that the TSY weakness isn't translating fully to MBS. Fannie 3.5's are up 15 ticks this morning and trading at 100-31, a level they've seen in recent days, whereas 10yr yields are 4 bps up trading at unfamiliar levels in the mid 2.3's (2.32 currently) 

All in all, it's a great start to the day, but the potential for a new range trade to emerge with 2.29 as resistance (2.42 as support) in 10's needs to be watched carefully. The mere "avoidance of further losses" versus yesterday's closing levels would be a huge win for bond markets today. Consumer Sentiment is the next "mover" at 955am. If current levels hold, any rate sheets out before then should be improved vs yesterday, but perhaps not to the extent that gains would suggest."

- That was this morning's Live Update on MBS Live!  And it continues to apply as markets continue to unwind some of yesterday's craziness. The strong performance of MBS vs Treasuries is also notable.  The MBS Team at Thomson Reuters IFR Markets sums it up well:

"MBS buying demand has been voracious at these levels (10yr note>2.20), with Originations moderate at $1.5 to $2 billion per day. Speaking of per day totals, the weekly New York Fed open market operations revealed another $5.5 billion bought over the previous 5 business days (Oct. 20-26) which amounts to nearly 80 percent consumption of Mortgage Banker supply in the agency market. Add to that the previously sidelined cash coming back at juicier yields and you have the spreads tightening story pretty well covered."

Indeed it's quite nice to back near 101-00 today and ultimately could make yesterday look like a mere blip below a support level--a "failed test to break lower," perhaps.

But there's also real risk that 2.30-ish will turn out to be a big pivot point in 10yr yields.

That's a possibility, and it's part of the reason we'd feel just fine holding onto 100-22 in Fannie 3.5's today (previously the "low 100-20's" is a level zone we referred to as the dividing line between maintaining resolve and panicking).  Here's the current chart in the MBS Live Dashboard (paid subscribers see the chart and price table update/flash in real time and we periodically overlay analysis that pushes to the chart in real time.  Learn More Here):

This morning's parting shot is a long term S&P chart with no comment from me.  Choose your own adventure on this one and tell me what you see in the comments section below: