MBS RECAP: Choppy And Slightly Weaker Ahead Of Big Ticket Events

MBS Pricing Snapshot

The post-Fed Twist buying volatility has died down to a large extent though we'd be careful to note and observe the fact that 10yr yields themselves are exhibiting clear "pivot behavior" around a very important level just under 1.69. That's more of an ominous cloud however. For now, MBS are well off their earlier lows, back to 103-20 now in Fannie 3.0s after hitting 103-15 earlier.

That stabilization was good enough for a Provident reprice for the better, but we'd need to see better gains before expecting many other lenders to make similar moves. The line in the sand for "better gains" seems likely to rest with the 1.687 technical level in 10yr yields. If 10's cross into that territory and are moving lower, then it feels like MBS would have a better chance at gains of their own. That said, we'd continue to note the uncertain level of correlation on "roll day" and to that end can really only watch and react. So with respect to the bounce off the lows, it's "so far so good" for now, but continuing to hold stead inside the highs and lows from earlier this morning.

It may have been hard to hear over the sound of Draghi's Bazooka last week, but the theme of conditionality is building since then, and is set to get a major dose of clarity with tomorrow's German Court vote. We also had Spain's Rajoy out yesterday saying the Euro zone shouldn't set budget conditions for Spain in a tone that bordered on defiant (it was reminiscent of Greek leaders' austerity gripes). Here's a Reuters piece from ECB's Asmussen today that essentially reiterates the same stuff, continuing to set the stage for dueling ideologies in the conditionality debates ahead.

(Reuters) - The European Central Bank's new bond-buying programme is no substitute for government reforms and belt tightening, ECB policymaker Joerg Asmussen said on Tuesday, keeping the heat on Spain to reform its foundering economy.

Asmussen's comments, just five days after the ECB agreed its potentially unlimited bond-buy plan, show the German ECB board member wants to deter Madrid and Rome from slowing reforms at the prospect of the ECB intervening to lower their borrowing costs.

The ECB has made any buying under its new plan conditional on the country concerned tapping the euro zone rescue fund for aid, which would come with strict conditions - a design aimed at calming German fears about the ECB's strategy.

European policymakers are now posturing over the nature of these conditions. Another ECB board member, Frenchman Benoit Coeure, said on Saturday countries that apply for help will not necessarily be asked to make more cuts.

"The OMT is in no way a substitute for continued efforts in structural reforms and fiscal consolidation on the side of governments," Asmussen said of the ECB's new bond-buying purchases, to be known as Outright Monetary Transactions (OMTs).

"They are essential steps to regain trust and to ensure the sustainability of the euro area in the long run," Asmussen, a member of the ECB's Executive Board, added in a speech at Goethe University in Frankfurt.

First of all, we'd note that lender reprice behavior around and on MBS "Roll" days can be inconsistent. Sometimes we'll see lenders forgo a negative reprice even when prices are down and other times we'll see inexplicable reprices when things aren't moving much. But we don't have the "things aren't moving much" problem at the moment.

Fannie 3.0s are down 10 ticks on the day now to 103-15 and 10yr yields just moved over 1.70 following the conclusion of the Fed buyback in the 25-30yr maturity range. The weakness takes MBS about 4 ticks lower than the lowest levels from rate sheet generation time and thus suggests some increased reprice risk.