MBS RECAP: More Gains, Still Stymied By Resistance

The U.S. Department of Housing and Urban Development’s Mortgagee Review Board (MRB) today announced that it is immediately and permanently withdrawing approval for AmericaHomeKey, Inc. (AHK) to originate and underwrite new mortgages insured by the Federal Housing Administration (FHA). In addition, the MRB is imposing $268,000 in penalties against the Dallas-based mortgage lender for repeated and serious violations of FHA requirements.

“When we begin to see a pattern of failure to apply our standards, we will act to protect FHA’s financial health as well as consumers,” said Acting FHA Commissioner Carol Galante. “We expect lenders to meet our requirements, not just to protect the safety of our insurance fund but to make certain they don’t set up borrowers to fail by putting them into mortgages they ultimately can’t sustain.”

Despite coming in at a weaker than-average bid-to-cover of 2.72 (vs. average of 2.93), the 7yr Note Auction was just about dead-on with 1pm "when-issued" yields (1.590 auction vs 1.589 when-issued) suggesting that markets were in an ideal position leading up to the result.

We wouldn't normally see bond markets rally after such an auction, but there are a few factors contributing to it:

A) we sold-off a bit heading into the auction
B) 7yr Auctions are a bit tougher than the rest
C) It's the last auction of the week

All of the above had the potential to release a little pent-up relief bid and so far, appears to be doing just that. While we'll always have to keep the caveat out there of "it's still a bit early to say conclusively," the reaction is favorable for now. MBS are at their highs of the day at 102-31 and 10yr yields, while not at their lows of the day, are back down from just over 2.18 to 2.164. The conclusion is "little to no risk of negative reprices at the moment," although positive reprices might like to see more time spent trading these MBS highs before they become increasingly likely. Benchmark 10's really need to break and hold below their pre-auction pivot at 2.1623 for that to happen.

Philadelphia Fed President Charles Plosser, scheduled to speak at 1pm, was out early, saying such things as

- may need to raise rates before late 2014
- fed should rethink stance if conditions worsen
- reiterated upside inflation risks
- and the biggie: "we should not anticipate additional accommodation.

This gave markets a little jolt, or so it would seem, with 10yr yields moving from mid 2.16's to 2.18. But we're reluctant to simply be satisfied with that causality as the stock market has followed bond yields higher--something it shouldn't probably do as a result of more QE being dismissed.

Either way, bond markets are under just a bit of pressure here ahead of the impending 7yr auction results, but after a brief dip lower, MBS continue at the 102-26 support and look to hold it for the next 60 seconds before the auction.

The last 7yr note auction on 2/23 was triumphant, with a 3.11 bid-to-cover and stopping through 2.5bps lower than the expected yield ("lower than expected" = auction's awarded 'high yield' versus 1pm 'when-issued' yield). The two auctions before that were less stellar, with 2.73 and 2.68 BTC's respectively, and both just over 1bp higher than expected in yield. Rounding out the previous 4 examples, November's auction was almost a carbon copy of February's, 2.5bps lower than expected and a 3.20 bid-to-cover.

This leaves the average bid-to-cover over the last 4 auctions at 2.93. The high yields from most recent have been 1.418, 1.359, 1.430, and 1.415, for an average of 1.406.

As always, the market reaction that follows the last auction of the week isn't always directly correlated to the auction results. Some latent trading ideas might be on hold from yesterday's auction, simply waiting to be sure that today's 7yr doesn't make them seem like bad ideas. In that sense, the evolving momentum just after 1:01:30 pm will be as informative as the results themselves, although we'd tend to view any "better-than-average" result as being good enough to elicit any relief bid, which might be on hold after yesterday's rather lackluster 5yr auction.