MBS RECAP: Held Up Well Into Selling, Even Better Into Rally

MBS Pricing Snapshot

Fannie 3.0s have packed on another 3/8ths of a point so far today and positive reprices are beginning to roll in. We're currently up 12 ticks in Fannie 3.0s to 105-25.

MBS were doing a fairly decent job of holding their ground even without participation from broader bond markets. But "risk" in general has tanked this afternoon with one of several potential headline culprits, not the least of which being renewed (or is that "neverending") fears of a Greek melt-down after the ECB's Asmussen said that Greece's financing needs could only be met by Euro zone states and that ECB participation in Greek refinancing was not up for discussion.

Stock prices and bond yields took their biggest swoop lower of the day on that news and have simply continued that momentum since then. 10yr yields are down to 1.684 and S&Ps are in the midst of their biggest daily loss of the month, down below 1450 for the first time since the QE3 announcement.

Positive reprices have been slow to arrive given the relatively aggressive rate sheets already in play this morning, but gains are sufficient now that we could see more into the afternoon.

After reaching a decision point around 11am, bond markets have held their ground against further weakness for now. Given that MBS had traded such a narrow range this morning, those "weakest" levels were only 6 ticks from session highs, allowing Fannie 3.0s to trade in positive territory at the moment, closer to their best levels of the day now.

Treasuries also bounced at 11am, but merely made it back from 1.73's to 1.72. 10yr yields had been as low as 1.692 earlier this morning.

Unrelated to the market movements, but noteworthy with respect to the big picture, Philly Fed Pres Plosser spoke earlier, saying that "increasing monetary policy accommodation is neither appropriate nor likely to be effective in the current environment.”

Although Plosser isn't in favor of QE3, he doesn't share the same battle cry as many of its opponents regarding inflation, noting "although higher gasoline prices are likely to push up inflation in the near term, these effects should be transitory. Thus, I do not see much evidence that we will have an outbreak of inflation in the near term."

Momentum from the stronger than expected Consumer Confidence numbers paused briefly for the inception of the Fed's scheduled Twist buying, but shortly thereafter, bond markets continued to leak to weaker levels. MBS are testing their 105-13 pivot point mentioned in the last alert and 10yr yields have already crossed higher over their 1.725 pivot.

Some risk for negative reprices already exists, but it's limited at these levels, both in terms of the number of lenders at risk and in terms of outright probability. This is just a heads up that we've inched one notch closer to reprice risk yet still haven't crossed definitively into negative territory in MBS.