MBS RECAP: Pain Trade Continues For Bond Markets. Will It Turn Out Like March?

MBS Pricing Snapshot

Fannie 3.0's are feeling the pain today, coping both with the overall bond market sell-off as well as their riskier spot on the MBS curve. As they afternoon leaks weaker, they're taking the most damage, down to session lows just over 102-02.

We've seen our fair share of negative reprices for the day, and this late-day weakness keeps those risks on the table, and increasingly so if we fall further from here.

In terms of broader markets, 10's are still hovering just over 1.80%, not demonstrating the same sort of directional weakness as MBS.

Sell-off's are no fun. As we've often discussed, it's hard not to let the direction of the line on the MBS chart suggest the direction of our moods. So hopefully this flashback to this piece from August 2009 (slightly modernized) helps lighten the mood somewhat (note: if you're not familiar with the original "Gangster's Paradise," this loses some of it's awesome. Otherwise, enjoy):

As I see no more rallies for the MBS
I take a look at my pipe
And realize there's nothing left.
'Cause I've been floating with positions so long
That even my momma thinks that old locks are blown.
But I ain't never floated deals, that didn't deserve it.
Massive Sell-Off overnight?, you know that's unheard of!
You betta watch how ya tradin'
What snowball sellin' you fadin'
Or the self-appointed gurus won't have room to talk.
I really hate the spread but I gotta lock,
As prices fall like rocks, I see myself in line for docs.
Fool, I'm the kinda LO all you fellows wanna be like,
Hedged my pipe in the night
Saying thanks MBS Live!

We've been spending most July living in a trader's paradise...
We've been spending most our time living in a trader's paradise...

Look at the situation, disconnected tradin'
I can't put out a decent quote, they keep raising my rates!
So I gotta be down with MND
Too much CNBC watchin', got me chasing dreams.
I'm an educated LO with rebate on my mind
But even three eighths in my hand makes a gleam in my eye.
I'm all locked up bankers! I'm out of danger!
And my LO's got lock sheets so don't arouse my anger.
Fool, another Provi reprice ain't but a day trade away,
Instead of living life do or die, I'll live to lock another day!
I'm at 3 seven five now, will I live to see 3 seven fo'?
The way traders tradin' I don't know.

Tell me why do we
chase more Y - S - P.
When the ones who win
Trade on Wall Street?

Just spent most of July Livin' in a Trader's Paradise

Looking to be about time for panic as bond market have taken on their own mass and momentum. Volume is surging, yields are climbing. Stops are getting triggered leading to lower prices and more stops getting triggered. This is compounded by new shorts entering the market as well and lower coupon MBS getting scared of being "left on the island" if rates adjust slightly higher (extension risk).

We've already seen an early batch of negative reprices and at current levels (down another 4 ticks from there and 10yr yields up over 1.80), it's fair to expect more.

***We highlight the following article from Reuters not because Germany is being restrictive but rather because there's been a shift in the restrictive tone in recent weeks. We've gone from a sternly shouted: "NEIN!" to Bundesbank president merely "having reservations." Again, ECB bond buying doesn't "fix" the Euro zone, but if it reduces periphery funding costs, it can at least soften what previously looked to be a fairly brutal crash landing. ***

(Reuters) - Any purchase of bonds from countries such as Spain and Italy by the European Central Bank must be linked to clear commitments to structural reform and budget discipline, German Economy Minister Philipp Roesler told Reuters on Wednesday.

Roesler, head of the Free Democrats (FDP) who share power with Chancellor Angela Merkel's conservatives, also said the euro must not be allowed to fail due to a lack of effort by countries at the frontline of the euro zone debt crisis to overhaul their economies.

"(ECB President Mario) Draghi has himself emphasised that bond purchases can never replace structural reforms and budget discipline. We take him at his word. That is the right road to follow," Roesler, whose FDP has been more sceptical about bailouts than Merkel's Christian Democrats (CDU), said in an interview.

Draghi signalled earlier this month that the ECB may start buying government debt to reduce crippling Spanish and Italian borrowing costs but he also said any intervention would only come if governments requested euro zone aid first. That in turn would be linked to conditions.

Many Germans, including Bundesbank chief Jens Weidmann, have major reservations about a new bond-buying programme, fearing it would reduce the pressure on governments to cut debt and make their economies more competitive.

Several reports of negative reprices already this morning as Fannie 3.0s saw a somewhat abrupt adjustment from 102-15 / 102-18 range down to 102-10 currently. These are earlier than normal and on less movement than has recently justified negative reprices. MBS and Treasuries both appear to have leveled-off since the 10am hour, but the simple existence of these seemingly unjustified reprices hearkens the possibility of more. Stay frosty. Panic is in the air.