MBS RECAP: Surprisingly Stable Rally. Waiting on NFP

MBS Pricing Snapshot

In recent minutes, 10yr yields managed to creep just slightly below their previous floor of resistance around 2.238. At the same time, Fannie 3.5 MBS rose to challenge a ceiling marked by a band of prices from 102-16 to 102-19. They're currently in the middle of that zone and have yet to move over 102-19.

When they do, if they do, we'd expect positive reprice potential to increase. Even so, we do already have one report of a positive reprice from one of the usual suspects among the "early crowd." More would probably follow suite above 102-19.

When the game is afoot, so to speak, as far as bigger, broader movements in bond markets, it's not uncommon for MBS to sit back and merely do their best to pace Treasury movements. As such, we're thinking we'd like to see a break below 2.23% in 10yr yields as a rough approximation of the likelihood for MBS to break the 102-19 pivot. If things move in the other direction, we'd now hope for 102-16 as support, and will assess from there if that happens.

The MBS holdings in the SOMA declined from a balance of $992 billion at the end of 2010 to $871 billion at the end of September 2011, reflecting the effects of principal payments. Principal payments led to especially large declines in holdings of MBS with 4.5 percent and 5 percent coupons, purchased in 2009 and 2010.

From October through the end of 2011, the Desk reinvested $77 billion of principal payments on agency debt and MBS into MBS, leaving total MBS holdings at $874 billion at year-end. Reinvestment purchases in the final quarter of the year were concentrated in recently originated 30-year fixed-rate MBS with coupons of 3.5 percent and 4.0 percent...

Volume is THICK. We really can't emphasize this enough--that tradeflows have been a steady 2-way push and pull since before the domestic session even began. 10yr Futures Contracts have almost broken over 1 million units already, which is about the average we'd see by 5pm most days.

For their part, MBS have held quite steady just under the band of resistance from 102-16-102-19. Fannie 3.5's are currently up 10 ticks on the day at 102-14. But MBS can't do much in the current environment besides keep an eye on broader market movements and adjust accordingly.

To that end, there's the ostensible battle in 10yr yields. Either it really is a battle or simply a determination to not make any major moves ahead of Friday's NFP. There are trading motivations on both sides of the fence and we get the impression that folks aren't exactly sure how to pass the time between now and Friday.

It seems like the overnight session in addition to this morning's trade shows a strong enough level of buying interest at higher yields (and "Real" money too! not much short-covering), but conversely, the resistance floor just under 2.24 is crystal clear in 10yr yields so far today. MBS are probably going to need a test of that level in 10's if they're going to break over 102-19 in Fannie 3.5's, but Thelma and Louise could still manage a soft landing if 2.27-ish holds on the high side for 10yr yields.

For the record, we're thinking about a "soft landing" support level in Fannie 3.5 MBS as being something around 102-13, which seems to have seen some pivot activity earlier this morning. That makes a break below 102-12 a good level to start thinking about reprice risk (if we see such a break).