MBS RECAP: Heavy Supply And Treasury Selling Weigh On Mortgages

MBS Pricing Snapshot

10yr yields hit their 1.532 pivot point discussed earlier, and though they haven't broken any higher in yield yet, MBS are noticeably on the defensive. That said, both 3.0's and 3.5's have been well-bid here at the day's new lows, with a good amount of defense around 104-29 in 3.5's and 102-19 in 3.0s. While that could minimize the overall damage of negative reprices, more are likely on the way given the outright levels.

Though it's a fairly recent development and despite the fact that Treasuries still look like they can find support before breaking into their weakest territory of the day, MBS already have. Fannie 3.5's are now down 11 ticks on the day at 104-31 and Fannie 3.0's are down 10 ticks at 102-22. Negative reprice risk is at its highest level of the day, with some small amount of insulation offered by the fact that benchmarks have yet to go through similar movements (i.e. the fact that 10yr yields haven't broken above 1.532 is a good thing and might help MBS catch a similar bounce).

Although we wouldn't call the brief lunch-time rally a 'non-starter,' it certainly didn't last long. 10's are now clearly moving of their own accord and MBS are sort of trying to mirror and match. Fannie 3.5's look risky, while 3.0's still seem like they could be maintain a sideways trend.

Whatever the case, from where we were about half an hour ago, things have noticeably reversed. 10's are up to 1.514 after making it as low as 1.49. Fannie 3.5's are down to 105-04 and 3.0's to 103-25. Negative reprice risk is slightly increased, but current levels aren't outside the range from earlier in the morning for MBS or Treasuries. Risks are somewhat lessened in that regard, but not absent, by any means.

The bigger issue levels from a technical standpoint mentioned in the last alert (104-03 and 102-22/24 in 3.5's and 3.0's respectively) are just underfoot and in terms of 10yr yields, we'd be most interested in the huge pivot point at 1.532. Watch any of these lines in the sand for warning signs of increasing negative reprice risk.

Coordinated moves in stocks, bonds, EU debt markets and to a smaller extent, the Euro, all suggesting a "risk-off" move taking 10yr yields close to their lowest levels of the morning. We don't see any headline cause-and-effect at the moment (not to say it doesn't exist), but the move looks like it started in equities markets around 12:13pm. This also coincides with a technical break below 1.249 in the Euro. S&P's are off about 4 points since then and 10yr yields down about 2bps.

In terms of MBS, Fannie 3.0's have been the bigger beneficiary, moving up about 2 ticks while Fannie 3.5's have added only about 1 tick. From the perspective of outright gains, it's not enough for a positive reprice, but if you factor in the choppy morning, and if a particular lender was more cautious with pricing as a result, then combine that with some decreased volatility and slightly higher prices, it's starting to feel like one of the "early crowd" lenders might toss out a positive reprice soon. We'd continue watching 105-03 in Fannie 3.5's for negative reprice risk or 102-22 to 102-24 as a spectrum of risk in Fannie 3.0's. (neither of those levels look to be in jeopardy at the moment, but if the recent rally changes course, those levels are where we'd start to care).