MBS RECAP: 3/12/2012

We got a nice example of a 'pivot point' on the 2-day chart of Fannie 3.5 MBS as 103-10 held as support. Actually, the pivot point has been well-traveled for longer than the current 2-day period, acting as sort of a central pit stop between highs and lows for 2012.

The first major examples of technically motivated price movements around 103-10 were seen as it capped gains for th month of January on three separate and distinct occasions, finally breaking late in the month.

it was almost a perfect midpoint between January Lows and early February Highs at that time, and now it's filling a similar role as the midpoint between February and March's highs and lows. Indeed prices seem to be honing in on 103-10 as the center of the debate between higher and lower MBS prices.

This isn't the kind of pivot point that we'd expect to act as significant support or resistance in the short term. Rather, we'd expect it to be crossed several more times in the near future. But ultimately, it looks as if it will prove to be a sturdy ledge in a push higher, or a frustrating ceiling preceding a more pronounced downturn.

Tomorrow's data and events might begin to inform such gyrations as we'll get major representatives from bond market's three favorite food groups. For ECON: it's Retail sales in the morning. For TRADEFLOW CONSIDERATIONS, it's the 10yr Auction at 1pm, and for MONETARY POLICY, it's the FOMC Announcement at 2:15am.

Plenty of market moving potential here... But a definitive break outside the 4-5 month 30bp range in 10yr yields feels like a long-lost dream. Incidentally, we're OK with that as it's been just great for MBS.

(Reuters) - The monthly U.S. budget deficit widened to $232 billion in February from $223 billion the same month a year ago, partly because February had an additional day this year, the Treasury Department said on Monday.

About $11 billion in tax refunds were issued on Feb 29, helping to reduce government receipts to $103 billion compared to $111 billion in February 2011.

Government spending was $335 billion in February, just slightly above the year ago level of $333 billion.

Even before the results of today's 3yr Treasury auction, we'd received two reports of negative reprices as MBS broke thei narrow morning range, moving down from 103-13 to 103-11.

Normally, we don't expect much market impact from a 3yr auction, and while we're indeed not getting much impact, what we are getting is negative. The high yield from the auction was excruciatingly higher than the 1pm when-issued yield although the demand at those yields was in line with recent averages.

10yr Treasuries and MBS have both demonstrated small negative reactions to the auction, but they seem to have mostly run their course now. The results are barely perceptible, leave each sector at their weakest levels of the day, or close to them.

Fannie 3.5's are still up 3 ticks on the day at 103-12. 103-10 is longer-term support, and 103-16 begins a band of prices to 103-19 constituting overhead resistance. We'd hope to not fall through 103-10 today, but aren't planning any forays above 103-16 either. If things weaken past the 103-10 level, we'd look to Friday's modal highs for support--around 103-06+.