MBS RECAP: 3/13/2012

Little has changed since the last reprice alert mentioned Fannie 3.5's in the high 102's. They're currently 2 ticks lower, down 12 on the day at 102-29. The scariest movement here is a resistance bounce (looks like prices rising and hitting a ceiling) at the same levels that provided support this morning (looks like prices falling and hitting a floor).

When prices quickly change from treating a particular level as a floor, to treating it as a ceiling (or vice versa), that level (often referred to as a "pivot point"), takes on some increased significance in that it's more likely to play it's most recently played role all things being equal.

That means that if flow of economic data, news, and market-moving events were magically shut off right now, Fannie 3.5 MBS would be more likely to hold underneath this morning's lows at 103-02. It was after prices failed to break back through that pivot point (just before 3pm), that more lenders started repricing for the worse.

Despite the weakness, things seem to have stabilized into the afternoon. 10yr Treasuries leveled off in the mid 2.12's and along with MBS, have traded in more narrow, calmer sideways paths since about 3:15pm.

Lenders who have not yet repriced for the worse are still at risk of doing so. Beyond that, it's looking like tomorrow's 30yr Bond auction, and to a lesser extent, the morning economic data, will be the next opportunities to see whether or not production MBS (the most widely originated coupons - currently Fannie 3.5's) continue to struggle with today's pivot point.

Fannie 3.5's just touched the high 102's for the first time this month, currently down 10 ticks at 102-31+, creating risks for negative reprices. More to follow...

The 10yr Auction came in with a lower “High Yield” vs the 1pm WI (“when-issued"). WI can be thought of as the market's estimate of where the Auction's High Yield will land. At 3.24, the bid-to-cover was slightly better than recent averages

Normally a 3.24 BTC and a few bps of a stop-through would be a net-positive for bond markets, but we have two things working against us at the moment. First, some consideration needs to be given to just how much weaker 10's have gotten since last week. It's not uncommon for markets to build in a concession before auctions, but this has been much more weakness than a concession alone could create.

In that light, "ONLY" stopping through to a 2.076 high yield from a 2.081 WI with a merely average bid-to-cover, lacks a certain measure of reassurance that we'd hope for in such scenarios. But then we'd consider the second thing working against us: the looming FOMC Announcement.

Long story short, not only may the auction statistics themselves have been affected by the upcoming FOMC Announcement, but even accounts who would normally trade in response to a 10yr Auction, in one direction or another, are likely waiting for that other big shoe to drop before committing too enthusiastically in one direction or another.

So just as we have been all week so far, we're waiting on FOMC for the first REAL opportunity to find out if bond markets will hold their ground here at the weakest recent levels, or push higher in yield (lower in price) to even weaker technical levels from the last quarter of 2011.

Following the auction, 10's and MBS have been generally stronger, but also choppier. It looks like they'll hold the line into FOMC though. Fannie 3.5's are 5 ticks down on the day at 103-04 and 10yr yields are a bit more than 3bps higher on the day at 2.07.

NOTE: One reprice was reported as MBS broke 1 tick above their pivot point at 103-04 as this was being written.