MBS RECAP: 1/26/2012

Although MBS aren't making any new highs, it's not uncommon to see a few lenders offer positive reprices when prices simply hold steady, especially when that steadiness is at the highs of the day (also highs of the past 3 months for that matter).

Either way, we'd at least be floating until cut-off today (key phrase being "at least"), barring a sell-off taking us below 103-06 in Fannie 3.5's (currently at 103-15)

quick notes on auction averages/statistics:

• Bid-to-cover: 2.87
• Indirects 40%.
• This will be the lowest yielding 7yr auction on record with the previous low seen on 11/23 at 1.415%
• Versus 1pm when-issued yields, 7's have tended to stop-out higher (8 of the last 10 times) for an average of 1.35bps (0.0135%)
• 7 Yr When-Issued is currently trading around 1.344, but it's not uncommon to see that shift in the next 3 minutes when Fed bids come in, and we'll also update it in the live chat just ahead of the release. (Note: subtract that WI from the auctions high yield to get the "tail" or "stop-through.")

Things had been exceedingly steady and narrow in range until a brief drop heading into the noon hour. Shortly thereafter, volume rose a bit, as did prices, leaving Fannie 3.5's at 103-16. That's a 14 tick improvement and the highest prices of the past two days. One positive reprice has already been reported, but we're not seeing the kinds of market movements that would lead us to believe many more are necessarily coming. That eventuality depends less on current price movement and more on lender-specific factors such as how a particular lender's rates have been trending versus the rest of the market, how/when they release morning pricing, how quickly they normally reprice, and what their inbound lock volume has been like.

Any way you slice it, things are good for bond markets at the moment, but this morning's bullishness does create more of a challenge for the upcoming 7yr note auction than it would have faced at last night's market levels. Whether or not that means that the high yield awarded and bid-to-cover will miss their targets is hard to say--whether or not anyone would care if they did, harder still. It's just something to be aware of in the coming hour as a potential market mover.