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

By: Matthew Graham
MBS Live: MBS Afternoon Market Summary
After hitting their best recent levels at the end of August, bond markets have simply been trending generally weaker in the first two weeks of September without much rhyme or reason.  Trading has been much more disconnected from data and headlines than the average "disconnected days," and we simply seem to have been drifting toward this upper end of a range of 10yr yields between 1.61 and 1.69.  We hit the upper boundary yesterday and actually tested a breakout today.  In terms of the yield movement, the breakout has unfortunately looked strong so far, but there's no question that volumes have simply been non-existent the first two days of this week.  It seems that everything will come down to the next two days with the German court vote and FOMC the following day.
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
FNMA 3.5
105-31 : -0-01
FNMA 4.0
106-31 : -0-05
FNMA 4.5
107-26 : -0-07
FNMA 5.0
109-07 : -0-03
GNMA 3.5
108-09 : -0-03
GNMA 4.0
109-20 : -0-04
GNMA 4.5
109-16 : -0-04
GNMA 5.0
110-10 : -0-05
FHLMC 3.5
105-22 : -0-04
FHLMC 4.0
106-21 : -0-08
FHLMC 4.5
107-09 : -0-04
FHLMC 5.0
108-15 : +0-03
Pricing as of 4:09 PM EST
Afternoon Reprice Alerts and Updates
Below is a recap of instant Reprice Alerts and updates issued via email and text alert to MBS Live subscribers this afternoon.

1:07PM  :  ALERT ISSUED: Treasuries, MBS Pull Back From Earlier Weakness, Back In Line WIth AM Levels
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.
12:57PM  :  ECB's Asmussen Reinforces Importance Of Conditionality For Bond Buying
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.
11:12AM  :  ALERT ISSUED: MBS, Treasuries Weaker After Fed Buyback. Negative Reprice Risk Increasing
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.
Live Chat Featured Comments
A recap of the featured comments from the MBS Live Dashboard's Live Chat feature, utilized by hundreds of industry professionals each day.

Ryan Kelly  :  "Our secondary market group has already for 45 & 60 day lock. 15 & 30 won't be affected till 9/25"
Matt Hodges  :  "many have already; WF will on Friday"
Jack Shotbolt  :  "Is everyone seeing their Investors bump their yield 50 bps or so to account for the upcoming GSE Fee increase?"
Matthew Graham  :  "I don't think there's much doubt that they'll rule in favor. The question is more about what sorts of conditions they'll lay out."
Jerry Turner  :  "so, if the German court rules in favor, what's the prognosis for US Treasuries (and MBS)? Seems it would move to risk-on in European markets and perhaps a sell-off in US bonds?"
Matthew Graham  :  "not bad JT. I don't know if that's the case or if anything can sway ze Germans from whatever course they may be set on, but your assessment is insightful and compelling."
Jerry Turner  :  "last minute sales pitch in the hopes of swaying the German court?"
Matthew Graham  :  "RTRS-WHEN ASKED WHETHER ECB WILL HOLD BONDS TO MATURITY ECB'S ASMUSSEN REFERS TO ECB STATUTES, SAYS ECB CAN BE ACTIVE BY BUYING AND SELLING BONDS AS PART OF MONETARY POLICY "
Matthew Graham  :  "RTRS - ECB'S ASMUSSEN SAYS IF THE CONDITIONALITY IS NOT GIVEN THE ECB CAN NOT BUY BONDS OF A COUNTRY "
Michael Tadros  :  "REPRICE: 1:57 PM - Interbank Better"
Matthew Graham  :  "RTRS - ECB'S ASMUSSEN SAYS WE SHOULD LIMIT OURSELVES TO ONE AND THREE YR MATURITIES WITH ECB BOND PURCHASES, NOT EXTEND BEYOND"
Rob Clark  :  "a- from ricky"
Matthew Graham  :  "No reaction in the long end. Any movement now is very likely not auction related."
Matthew Graham  :  "RTRS- U.S. 3-YEAR NOTES BID-TO-COVER RATIO 3.94, NON-COMP BIDS $30.28 MLN "
Matthew Graham  :  "RTRS - U.S. SELLS $32 BLN 3-YEAR NOTES AT HIGH YIELD 0.337 PCT, AWARDS 5.19 PCT OF BIDS AT HIGH "
Rob Clark  :  "3.94 btc"
Michael Tadros  :  "REPRICE: 12:52 PM - Provident Funding Better"
Matt Hodges  :  "WF hits on Friday"
S John Murray  :  "Not sure if this was already mentioned but we are starting to get the G Fee rate extension notices....as of today Chase Correspondent increased extension and relock fees by .625%...that is a steep hit... I am sure the rest will follow suit"
Matt Hodges  :  "yes, they have not changed it, though they did threaten"
Jason York  :  "FHA is still 6% correct?"
Matt Hodges  :  "don't ever forget the 2% rule, nearly got burned on that on investor"
Matt Hodges  :  "2% on n/o/o"
Jason York  :  "or 9% with 75% or less"
Jason York  :  "nevermind, found it, up to 6% on conventional for 75-90% ltv"
Matt Hodges  :  "depends on ltv, jy"
Jason York  :  "max closing costs for conventional is 3%, and FHA 6%, correct?"
Victor Burek  :  "clearly unconstitutional..but i bet they allow it"
Jason Wilborn  :  "30,000 individuals are protesting the constitutionality of the program - the biggest constiutional challenge in German history"
Jason Wilborn  :  "read an interesting article yesterday about the German Court Review of the ECB bond buying proposal"
Matthew Graham  :  "(for anyone who's lost, that's the German word for "conditions" as the important court vote due tomorrow is seen as essentially laying out the conditions under which troubled Euro states can receive Euro zone aid. This is a bit of an oversimplification, but there ya go)."
Matthew Graham  :  "yeah it looks very similar, and will be a perfect example of history repeating IF the reaction to FOMC is bond-market positive. Probably would need some extra strict bedingungen tomorrow as well. (woops, there I go again implying that Germany sets the conditions under which the rest of the Euro zone can access their emergency funds. Oh wait, "implying" might mean it was open for debate, so yeah, bedingungen!)"
Andrew Horowitz  :  "MG in regards to the 10 year a little bit of history repeating itself from march?"

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