MBS RECAP: 2/9/2012

Volume surged briefly following the 1pm 30yr Bond Auction, but has since died down. In the process, Treasury yields and MBS prices experienced a bit of volatility, but that now seems to be resolving itself in a favorable manner. Fannie 3.5 MBS are down only 4 ticks on the day at 103-23, and 10yr yields are down to 2.045 after being as high as the 2.07's before the auction.

New and meaningful headlines out of Europe have slowed to a trickle and there are no other major decisions or announcements scheduled to be made today. Several officials are on record as saying that the Greek bailout agreement is a done deal but other officials note that nothing official will be announced today.

Whether it's some hesitation on that news or simple technical exhaustion after selling off nearly 30 bps in February, 10yr yields look as if they'll record a closing mark under or very close to long term support for their trend channel which passes through 2.56 today.

MBS charts are starting to look fairly decent considering the morning weakness, with a nice double bounce off 103-18. If prices were to continue to operate at current levels, a few lenders might soon consider a positive reprice, but the morning volatility means there could be more hesitation than normal. We also tend to see fewer reprices during the MBS settlement cycle, and today is "48 hour day" and March coupons will be front-month after the close tonight.

Although it's still too soon to plan on current support levels continue to hold up through the day, MBS have done a decent job of holding the line at February's lows this morning. From the 3rd through the 8th of the month, Fannie 3.5's ground incessantly against 103-18 and have bounced there again this morning. 10yr yields are much higher than their highest February levels and are trying to establish some support at high yields from earlier this morning just under 2.06.

The fates of Fannie 3.5's with respect to 103-18 seem tied to this 2.06 mark in Treasuries for now, but given the recent volatility in spreads, a linear relationship between the two is not guaranteed, especially with roll-related liquidity considerations.

Several European finance ministers have come out saying that there won't be any results from the Eurogroup meeting today, something that Greece's PM indicated as goal in extending last night's meeting. That could be partially fueling current bounce attempts for bond markets, but technical factors could certainly be in play as the sell off takes 10yr yields to very long-term trend channel support. Markets may also be interested to see how today's 30yr bond auction goes as well as any other enlightening headlines out of Greece.

After bouncing at 103-18, Fannie 3.5's are currently back to 103-22 while 10yr yields are down to 2.0399 after nearly touching 2.06. Despite the bounce, we did see one report of a reprice for the worse, but that was from a lender that tends to price earlier in the morning than most. The majority of lenders priced late enough in the morning that MBS had already experienced most of their losses. Thus, we don't think additional reprices for the worse are too terribly likely unless prices turn around and start falling again. It could happen, but at the moment, is not warranted by the price action.