MBS RECAP: 3/19/2012

10 yr yields have been as high as 2.3917, getting much closer to the 2.40-2.42 range that many are looking to for support. Fannie 3.5 MBS are at their worst levels since early December.

For MBS, today's trading stands in stark contrast to Friday's outperformance (MBS made gains while Treasuries ended a bit weaker). Relative to the other day's in the broader sell-off, today is tied for the worst for MBS, currently down 21 ticks, the same as drop seen on 3/14.

Treasuries, while certainly not having any sort of fun, have sold at a slower pace than 3/14 rising only 8bps so far on the day vs Wednesday's 14bp rout.

With each jump weaker, bond markets are making seemingly supportive gestures--as if they might finally bounce. Current levels are once again giving off those signs, and once again, they could be genuine or could result in another ratcheting weaker. In the case of the latter, expect another wave of reprices for the worse. In fact, they'll likely just continue to roll in depending on the lender, unless we bounce here, and convincingly so.

Both Treasuries and MBS broke past technical support into weaker territory. The last line of defense had been 102-06 for Fannie 3.5's before negative reprices would become increasingly likely. We're now down 10 ticks on the day at 102-03 and additional reprices could follow. 10yr yields broke higher past their 2.323 short term pivot and now sit at 2.341.

Greek CDS payouts were priced at an auction today at €0.215, which was largely as-expected and uneventful. One way to measure the severity of a CDS payout in terms of implied impact on markets is to look at the net open interest. Today's auction saw just under €300 bln whereas some analysts had been predicting over €500 bln. Reuters estimates the total payout to be under $3bln to CDS holders.

Stocks rose a few points on the news and for a moment, it looked as if bonds would follow. 10yr yields moved to their previous high of the morning just over 2.32 but have since fallen back to 2.308. Fannie MBS hit support at 102-06 and have bounced back to 102-12. We did receive one report of a negative reprice, but that occurred before the CDS news and was not from one of the normal "early-crowd" repricers, suggesting motivations beyond market movements.

That said, market movements are somewhat of a concern. We'd keep an eye on a narrow band of technical levels in Fannie 3.5 MBS at 102-10, 102-08, and 102-06. Breaking lower through these would be like a "bad, worse, worst" in terms of negative reprice risk. For guidance from 10yr TSYs, we'd hope for a break below 2.305 as a positive indication and to hold 2.323 support on the upside. Crossing higher would be a negative indication although we were as high as 2.332 earlier this morning.