MBS MID-DAY: Bond Markets Get The Assist From Stocks, Europe

MBS Pricing Snapshot

After clawing back to breakeven levels from much weaker territory overnight, bond markets weren't eager to progress into better territory as a few big block trades pushed yields higher just after 9am. The domestic stock market open helped things moderate, and 10yr yields held supportively at 1.6557 and Fannie 3.5's at 104-26.

With an empty data calendar today, markets are tuned-in to the Spain bailout information/reaction, where conflicting headlines and midstream changes of plans are causing renewed safety buying in Treasuries, bringing MBS along for the ride.

Most recently, it was the flip-flopping on the decision of which EU bailout entity will fund the Spanish bailout that helped bond markets solidify a bounce back that already seemed to be in progress. It was thought earlier that the ESM would be the more likely source for funding (read more...), but wires out just after 10am suggested that the bailout could come instead from the EFSF in the form of bonds--similar to the Greek recapitalization--that could then be taken over by the ESM.

10yr yields fell from 1.63 to 1.615 on the news. Fannie 3.0's are up 2 ticks on the day at 102-12 and 3.5's up 2 ticks at 104-31.

For the record, we're not convinced that the post-10am movement is due to the EFSF headline itself (it does make things a bit more complicated, not to mention that the Finnish government really doesn't care to take part in an EFSF-funded bailout without additional guarantees), or simply the lack of a forceful and unwaivering response in general.

Earlier this morning during Asian trading, things were decidedly weaker as noted in the Week Ahead (also linked below). In it, we note that it's not uncommon to see things bounce back in the domestic session after events such as the weekend's Spanish bailout festivities cause the overnight session to get off to a rocky start.

That has indeed been the case today as the seemingly overdone selloff in the Asian session was met with strong support at the lows, ultimately resulting in the domestic session opening up in roughly neutral territory vs Friday's latest levels. Fannie 3s and 3.5s are 3 and 2 ticks better respectively and 10 year yields are back under 1.63 after rising into the 1.7s overnight.

Although the remainder if the week is an exception, there's no scheduled economic data today, leaving markets to further hone in on their preferred levels in response to a very much 'as expected' Spanish bailout.