MBS RECAP: Opening Levels Hold All Day Long

MBS Pricing Snapshot

There was precious little information in today's Beige Book release that constitutes "news." Indeed, markets have scarcely reacted. There are a few things to simply make note of, before moving on to tomorrow and beyond.

First, there's logically been an increase in the certain components of the report that cite rising fuel costs as potential impediments to growth and/or spending on the near term horizon. Both producers and consumers were cited as feeling the pinch, with manufacturing, transportation, and discretionary income potentially affected. Also slightly bearish for stocks is the mention that the unusually warm weather positively affected recent retail spending.

Slightly less on the radar were "frequent reports" among employers of difficulty finding qualified workers. Then again, it was on some radar... This is from late 2010:

" businesses are replacing more and more low-skilled labor with investments in technology. This affirms the idea that low skilled labor will face extra sticky hourly wages and find less incentive to seek out work" - read more...

Full Beige Book Link:

* March budget gap $198.16 bln vs March 2011 $188.15 bln
* First half of 2012 $779 bln vs H1 of 2011: $829.4 bln
* Treasury says $30 bln in benefits pmnts shifted from Apr to Mar
* Treasury says TARP and educational subsidies added $20 bln
* Gov spending down to $369.4 bln vs $339.0 bln in March 2011

Full Release:

MBS managed to hold on to 103-06 support despite one brief move lower. 10yr yields now look to have put in support in the mid 2.04's.

Fannie 3.5's are down only 5 ticks on the day now at 103-09 and near their highs of the day (103-11). 10yr yields are down to 2.0298. Trading is active and 2-way at the moment, but favoring bond bulls for now. Positive reprice risk slightly outweighs negative now.

That's all we know so far... The auction itself wasn't horrible with a high yield in line with 1pm WI and a 3.08 Bid-to-cover, a roughly average result. But Treasuries initial move was higher in yield and MBS quickly fell to the lows of the morning at 103-05, though they've since bounced to 103-07.

We'd be surprised to see weakness spiral out of control after such an auction, but some lenders might be spooked if things don't bounce right back. Watching mid 2.04's for support and 103-06 in MBS. If prices are below 103-06 for more than a minute or two, reprice risk is increasing.

Today's 10yr Auction is the 2nd reopening of the February 8th refunding (cycle: 1 refundings, 2 reopenings). So far, all the reopenings of the 2.00% coupon (which has been in effect since 11/8/11) have stopped through at lower than expected yields. But that has only been 3 reopenings.

Furthermore, the last refunding was strong as well, which does a little to refute the the idea of differentiating too much between refundings and reopenings. So we don't want to get too deep into trying to predict whether or not we'll see yields come in higher or lower than 1pm WI.

The more objective differentiation is between the Bid-to-cover ratios of the two types of auctions. Reopenings, like today, tend to have higher bid-to-covers, with an average of 3.19 since the fateful FOMC Announcement in August 2011. Refundings have averaged 2.97 over the same time.

In other words, if the bid-to-cover isn't OVER 3.0, that's relatively weaker demand than recent history suggests and would need to be accompanied by a decently sized stop-through (actual high yield coming in lower than 1pm when-issued yield) in order to suggest a favorable result.

With no scheduled Fed Twist buying to support Treasuries, plus the need to accommodate today's 10yr Auction ($21 bln), some measure of weakness was to be expected. But the Weakness has been far from alarming with 10's merely creeping up into the 2.03's for the most part, whereas we see the more serious pivot zone beginning in the mid 2.06's.

It's pretty scary territory above 2.06 as we don't really have much by way of recent yield movement between there and 2.14 (though there's plenty of 2.06-2.09 from early March).

10's have been inching higher inside a fairly regular trend channel but are currently testing the LOWER side of that channel. It would be a bit of a surprise to see further rallying develop 2 hours before the auction. In fact, we'd rather NOT see any acceleration to the downside in yields as it could make the auction tougher.

MBS, for their part, seem content to go mostly sideways this morning, slightly outperforming Treasuries. Fannie 3.5's are currently down 6 ticks from yesterday's post-roll close of 103-14 to 103-08, and haven't deviated from those levels by more than 2 ticks. Things are VERY calm in in terms of price action, though volume is heavy and fairly well balanced.