MBS RECAP: Seeking Some Sort Of Equilibrium Before FOMC Sneak Peek

MBS Pricing Snapshot

Despite an uptick in new origination volume in MBS this afternoon (not to mention the $8 bln+ so far this week), Fannie 3.0s and 3.5s are trading well with a reasonable portion of earlier losses recovered.

For Fannie 3.0s, that means 102-07-ish, up from an earlier trough at 101-31 (still quite a distance to the morning highs at 102-16+ though). Fannie 3.5's fought for and largely held supportive levels around 104-17 and are now back over a short term pivot at 104-22, currently 104-24. 10yr yields are into the 1.64's and approaching 1.63's, their lowest levels since noon.

It's not out of the question to see one of the characteristically early-to-act lenders reprice positively when charts look as they do presently. But the more important point is to update you on waning negative reprice risk. If the last update was to make note that the bleeding had stopped, this one is to suggest it's almost time for the patient to go home.

Too soon to call the game and lenders who have yet to reprice for the worse are still at risk of doing so, but we're seeing a few more technical cues suggesting 1.67% and change is as high as 10's wanted to go in today's session. After hitting 1.6712, a big trade hit Treasury futures slightly before 12:30 which prompted the biggest minute of volume of the week at 12:27pm, assumed to be mostly sellers covering shorts from the sub 1.5% trading last Friday and early Monday.

Volume is big overall and the bounce back lower in yield is anything but decisive. 10's have sort of been grinding between 1.64+ and 1.67 for the past hour and change, but the trend over that time has been slightly lower in yield.

MBS keep on truckin' in their more equanimous posture with Fannie 3.5's still never dipping below 104-16 and up now to 104-21, a scant (compared to Treasuries) 6 ticks lower on the day.

Not much left for today as the big trades around 12:30 seem to have drawn a line in the sand ahead of what's increasingly perceived to be an "FOMC-Announcement Teaser" in the form of Bernanke's Congressional Testimony tomorrow morning. It's not safe to assume that we're immune from leaking to weaker levels in later day illiquidity, but it does look like the volume is in for the day and when all is said and done, we'll be able to look back at today as the first major encounter with high 1.6's in 10yr yields acting as a CEILING as opposed to a floor. Whether or not the ceiling holds, there's no way to know, but if we keep our cool for another hour and 20 minutes, it will at least have held for today.

Bond Markets continue ratcheting to weaker levels with the 10yr already through it's 1.65 pivot and getting very close to testing the previous all-time low at 1.674. After breaking 1.30 earlier, German Bunds have had a pretty straight run up to 1.35, a clearly-delineated pivot for them.

Despite outperforming into the sell-off, MBS are down enough for additional negative reprice risk. Fannie 3.5's are down 10 ticks on the day at 104-17 and 3.0's down 15 ticks at 101-32+

10yr yields hit their highs of the day following the 10:15-11:00 scheduled Fed Twist buying in 2036-2041 maturities. 10's are currently sideways around the 1.62 mark and haven't yet bounced back lower as is more often the case. MBS had been hangin' tough without giving up much ground, and though they remain in better day-over-day territory than Treasuries, are starting to show some signs of weakness. Fannie 3.5's are down 3 ticks on the day at 104-24 but had been trading at 104-26 before the Fed buying details were released. If we don't bounce back to stronger levels very soon, it's a fairly negative turn of events as far as it's implication on momentum.