MBS RECAP: 2/16/2012

There has been a lot of "noise" this week concerning various aspects of the Greek bailout, including a motley influx of headlines about an hour ago. The only market mover of the group is the news that the ECB is airlifting itself off the sinking ship, so to speak. Over the weekend, the ECB will swap out their Greek debt in exchange for similarly-termed debt minus the imminent guaranteed loss and implicit involvement in a private sector bond swap expected to follow Monday's approval of the bailout.

Since the ECB bought these bonds at a discount, they'll have some cash left-over as the bonds are being swapped out at face value. That cash goes back to the various Euro zone states from whence it came. Although the party line is that EU states can do whatever they want with the cash, the tacit instruction from the ECB is "Hey you guys... Here's some cash for you to give to Greece." While simply "giving cash to Greece" may be a gross oversimplification, it's not an inaccurate one.

The idea is that this will not only get the ECB out of dodge ahead of Private sector negotiations, but will also help lessen the haircut requirements that seem to have risen almost uncontrollably (from 50, to 60, and now 70 per cent).

That's what's behind bond-market weakness in a nutshell, not the flowery talk of expected approvals of bailout packages. No one really cares what Euro zone officials THINK will happen with the bailout vote. This ECB swap news is something substantive that markets can sink their teeth into. So far those teeth have taken a bite out of MBS prices, along with Treasuries, but those losses seem to have found some support as markets realize that the news is more about "housekeeping" ahead of next week's events than it is some epic shift in the handling of Greece's bailout.

(Reuters) - European Central Bank policymakers said they have no wish to book a profit on Greek sovereign bonds the ECB holds and gave a green light on Wednesday for euro zone member states to pass on the funds to Greece.

Joerg Asmussen and Luc Coene both backed an idea floated by ECB President Mario Draghi last Thursday for the central bank to help Athens indirectly by relinquishing the bond profits - a move that could help Athens avoid a chaotic default.

Discussion is underway about how the central bank could book those profits up front, to provide an early lump sum for Greece, rather than seeing funds dribble in over years as the bonds it holds mature.

Asmussen told Reuters that while the ECB cannot contribute directly to a second Greek aid package, it would pass any profits from its sovereign bond purchases to central banks in euro zone states, which governments could then use for Greece.

"If there should be a profit, we will pass it onto the national central banks, as foreseen by our statutes. Then the member states can decide to use this as a contribution to finance the Greek program," he said in an e-mail interview.

The biggie:

RTRS- - EURO ZONE CENTRAL BANKS TO EXCHANGE THE GREEK BONDS THEY HOLD FOR NEW BONDS TO HELP GREEK DEBT DEAL - PAPER

MBS are down 12 ticks at the moment at 103-13 and negative reprices are likely if prices stay close to these levels or fall further. More to come....