EU Headlines Once Again Dictate Direction for MBS

Longer maturities didn't move following the auction, but did rise slightly after the Fed's Plosser flew down from perch high atop Hawk Mountain to squawk more hawkish notes regarding the recent discussion out of the FOMC on "targeting" various economic metrics such as U/E and GDP are merely "trojan horses" for increasing inflation. Plosser argued that inflation, in fact, is the only one of those three things the fed CAN control and should adopt a "no more than 2% explicit target." 

Kocherlakota fired back shortly thereafter in a separate speech saying that these sorts of specifics would ease uncertainty in the markets. Kocherlakota also reiterated the potential of the Fed to buy MBS, although this is a foregone conclusion as a possibility after Bernanke's presser last week. 

But the bigger moves on the day came on news of Italy's Prime Minister's likely resignation.  Here's the reprice alert from MBS Live at 1:51pm

Potential Reprices for the Worse as Bonds Weaken on Italy PM Resignation 1:51 PM

RTRS- ITALY'S PRESIDENT SAYS BERLUSCONI WILL RESIGN AFTER APPROVAL OF NEW BUDGET LAW 

that's the headline that just crossed while MBS were already nearing levels that would cause concern for reprices for the worse. Selling has picked up a bit since the headline as stocks surge toward their highs of the day. Benchmark 10's are up a quick few bps to 2.038 and Fannie 3.5's are down 4 ticks on the day now at 101-30. 

Reprices for the worse are likely to be seen if these levels persist. Caveat: this JUST happened, so we don't yet know if there will be a knee jerk bounce back, but if you're keeping an eye on MBS prices, and they're staying at 101-30 or lower, reprices are likely. (stock gains are a good proxy at the moment as well).

This chart paints a good picture of the connectivity between EU events, domestic stock markets, and Treasuries:

As you can see, the Euro (in green) led the charge when the Berlusconi announcement came through.  Everything since then has been a moderate dose of snowball selling for bonds.  But in a slightly longer term perspective, the selling was fairly nominal.  Even after "the roll" tomorrow, we'd merely be at the red line in the MBS chart below, still higher than the very best MBS prices seen through most of October:

Another good line in the sand for bond markets is around 2.11 at the moment.  Really, anything from 2.10 to 2.13 is in this same sort of "inflection range" that separates recent trading from most of October's ugliness. 

Still very much in the game for now.  Today's losses are unpleasant as are the reprices that came with them, but hopefully the above two charts give you the sense that it could be a lot worse.