MBS RECAP: 3/20/2012

Lots of alerts, I know, but figured you'd rather have the play by play if you're in the field today...

Big volume sellers brought on the test of 2.40 in 10yr Treasuries, but bigger volume buying held the line. The highest tick we got in cash 10's was 2.399.

MBS are just watching and reacting, and as 10's have bounced down to 2.3845, MBS have rebounded to 101-24, still in negative territory, but not as scary as before. Negative reprices are still very possible, but the "ugliness" mentioned in the last alert should be mitigated somewhat by bond markets' willingness to put up some sort of fight at current levels.

Scary levels for Fannie 3.5's and 10yr yields alive. The former just broke a few ticks below the old "concrete floor" level from November 2011 at 101-25 and is currently at 101-22. The latter looks determined to test 2.40 and higher. Unless something changes right now, and in a big way, reprices are highly likely, and they will be ugly.

Depending on when you glance at prices, they may or may not be in the red, but both Fannie 3.5's and 4.0's have returned to levels close enough to unchanged on the day that risks of reprices for the worse are probably are more pronounced than they were at last check.

MBS are paying some sort of attention to Treasuries here, looking for some guidance on what has turned out, thus far, to be the slowest and most range-contained trading day of the multi-day bond market beating. The latter are attempting to hold their ground at 2.375 with questionable success. The more questionable and less successful they are, the tougher things may get for MBS and the more likely reprices may become. We wouldn't rule out a reprice from one of the "early crowd" even now, but aren't running for the bomb cellar just yet.

Fannie 3.5's are 1 tick in the green at the moment at 101-25 and 4.0's are unchanged on the day at 104-06.

This alert serves to unwind some of the more serious risks of negative reprices on the earlier weakness, taking us back to more neutral territory at the moment. Although we did indeed get two reports of negative reprices, there were flags on those plays due to "late hist." In other words, the negative reprices came out when MBS Prices were already in the process of bouncing back.

Whether or not they continue to bounce back is not the sort of thing we're comfortable trying to predict, but we'd generally view negative reprices as less of a risk if Fannie 3.5's are trading over 101-29 and as more of a risk if they're trading below 101-26. The zone in between is uncertain and would have much to do with lender-specific considerations and initial rate-sheet timing.

To be clear, negative reprice risk is not completely gone, but somewhat decreased while 3.5's and 4.0's are trading at or above current levels (101-28 for 3.5's and 104-08 for 4.0's. Yeah.... I said 4.0's.... )

Caveat: scheduled Fed "Twist" buying is a way of life these days and we often see brief examples of whipsaw volatility with rates ultimately settling into similar levels as seen before the buying. But we're cognizant, at the moment, that lenders are especially sensitive to various bouts of selling, especially if those take prices to the lowest levels of the day.

With the highest volume of the day, bond markets moved to their weakest levels after the details of today's round of Twist buying were announced. Negative reprice risk is increasing and we wouldn't be surprised to see a few of the "early crowd" come in with a reprice here, assuming they were out with rates before 8am.