MBS RECAP: 11/8/2011

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).

Yes, it's strange to consider, but we may be looking at a fed speaker other than Bernanke moving markets enough to be detected. The 3yr auction certainly did NOT shake things up much, coming in just slightly better than expected (3.4 BTC vs 3.3 last time and a slightly lower .379 high yield vs .386 WI).

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.

MBS are chopping around a bit on all the hullabaloo, but 3.5's are still a tick in the green at 102-03. 102-06 is ongoing resistance today as is a 2% level in 10yr yields (currently at 2.0151). We're in a bit of a holding pattern where any further MBS weakness could cause reprices for the worse and a solid return to 102-06 or above, reprices for the better.

Both Treasuries and MBS continue to trade inside yesterday's range and have generally been consolidating (lower highs and higher lows). This phenomenon is more pronounce in 10's as MBS have been a bit choppier than benchmarks. Even so, the "triangle" technical formations currently highlighted on 3.5 MBS and 10yr charts seem to be holding with about 20 minutes to go until auction results, suggesting that the auction might be the event to cause a breakout on one side or the other. As a shorter duration on average than 10yr notes, we'd expect 3.5 MBS to react to a slightly greater extent. Here are a few quick stats on recent 3yr auctions:

- 8 out of the last 10 have stopped at lower-than-expected yields
- All but one of those 10 had a 3+ bid-to-cover
- last 5 btcs: 3.30 / 3.15 / 3.29 / 3.22 / 3.28
- recent indirect bidder average = 39%
- Dealers averaging about 50%, directs the other 11%
- only one other auction at similar yields - 9/12/11 at 0.334%
- "when-issued" (estimated high yield of auction) currently 0.369%