MBS RECAP: 1/11/2012

Most of the the would-be content for this alert was in the last one regarding auction results and 10's temporary indecision between 1.90 and 1.92. After a decidedly supportive bounce lower from 1.92, MBS have begun trending higher, currently at 103-01. This is enough for a positive reprice from a few of the characteristically early lenders, but it should be noted that ranges are fairly narrow and benchmarks haven't made any decisive move other than to hold their first test of 1.92 support. Even so, positive reprices are possible, but would be more widespread with more time at these levels or simply more gains.

Today's 10yr note auction stopped at a 1.90% high yield, which is quite a departure from the September's previous record holder at 2.00%. Despite that, and despite the rally heading into the auction, markets still beat the 1.91% when-issued yield (marking the 1:01:30 "when-issued" yield is analogous to the consensus on where the auction will stop). There was stronger than average demand as well, with 3.29 dollars bid for each dollar offered, a bit better than the 3.02 average for the last four re-openings.

Despite the strong results, bond markets have moved sideways to slightly weaker following the auction. This isn't the sort of weakness that has us expecting a reprice for the worse, merely a sort of acquiescence that the rally leading up to the auction did just about a perfect job of anticipating demand. 10's are currently doing a bit of their "which way do we go" shtick between 1.90 and 1.92 while Fannie 3.5 MBS wait for those cues before breaking more than a tick or two in either direction of 102-29. Significant technical support was seen this morning at 102-25+.

bottom line: things are pretty sideways for now, and that's impressive strength considering the pre-auction rally. We'll let you know if "sideways" changes.

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As has been the case so many times of late, MBS are holding steady while benchmarks are trending. Fannie 3.5's are basically trading at opening levels while 10yr yields continue a 2-day downtrend. The discrepancies are very slight, but it was same yesterday: MBS honed in on opening levels from 2pm on while 10's improved slightly.

Yesterday looked as if it would favor the short end of the yield curve, and indeed it did, both heading into the open and briefly following the 3yr auction, but the longer end fought back to a pivot point around 171bps (between 10's and 2's) and is currently at 1.6968. But that flattening trend is now contending with some technical resistance in outright 10yr yields as well as a potential pre-auction concession.

The following MBS Commentary has a good look at the ongoing "triangle" in 10yr yields as well as a slick little video of a chart zooming in from a long term daily view of a trend channel in Fannie 3.5's to a short term view showing the same trendline, as well as some commentary on how we're approaching the trendline.