MBS RECAP: Buoyed By AM Data, Beaten Back By Stress Test Results

MBS Pricing Snapshot

Trading was fairly slow from 1-2pm and has recently ramped up a bit as bond markets bounce back from the weaker levels of the day. MBS are back in the green with Fannie 3.0s up 3 ticks on the day to 105-17. 10yr yields are off their 1.65 highs and back down to 1.63's.

Whether or not the bounce back in MBS will be sufficient for POSITIVE reprices likely depends on the lender. Negative reprices were still coming in even after the bounce began to materialize.

At lease we can say that reprice risks are more balanced now. While negative reprices are still possible, and equal case could be made for positive reprices among lenders who repriced for the worse just after noon.

A few days old now, but so good that it will continue to transcend the datestamp for the near-term foreseeable future.

Counterparties: The Never-Ending Story Of The Euro Zone Crisis

The pattern of Euro crisis flare-ups is getting very familiar:

Step 1: News of political turmoil in ailing European Country X raises questions about their dedication to austerity. This is often be accompanied by missing deficit targets, riots and/or burgeoning political change.

Step 2: The bond market freaks out, which raises borrowing costs for European Country X. Wonks, politicians and pundits quickly chime in.

Step 3: The can is thoroughly kicked down the road. Concessions are made for Country X, negotiations are held, quotes are given/intentions leaked.

Step 4: After some period of time, the crisis appears again.

Spain, like Greece, is is back in the Euro crisis spotlight today, as the country is gripped by massive protests over budget cutbacks and rising borrowing costs. Greece, of course, has been through this process before; Spain has now proceeded to step 2.

Read the rest here:

Essentially, the results of Spain's Bank stress tests indicate that the amount of bailout funding currently being discussed (€100 bln) would be more than sufficient to recapitalize a "worse-case-scenario" (€60 bln according to today's stress tests). This has stocks on the rise and bond markets on the run at the quickest pace and highest volumes of the day, not to mention the fact that it shows where markets' attention continues to be most directly focused.

MBS fell further from earlier lows, hitting 105-10 at the trough, but up to 105-12 presently. Definitely well into negative reprice territory here.

Fannie 3.0s are only up 1 tick from yesterday's closing levels now, and those closing levels represented a drop-off from much of the day's action. We're now at the lowest levels since Tuesday morning painting a picture of broader consolidation of the post-QE3 rally. Negative reprice risk is incrementally increased on this most recent downtick, not to the extent that every lender will reprice, but upgraded from a "heads up" status.

In much the same way that it wasn't a good idea to pay much attention to Treasuries just after the QE3 Announcement, it's not such an informative thing today either. Whereas 10yr yields are mid range and in decidedly better territory than most of yesterday, MBS are at their lows and decidedly in line with their weakest levels yesterday.

This is more of a heads up than a reprice alert, thanks to the big slide in prices from 9am to 9:45am. Fannie 3.0s moved from 105-26 to 106-18 during that time, which led up perfectly to rate sheet generation times.

We bounced up to 105-22 at 10am, but that still leaves the current prices only 3-5 ticks weaker than rate sheet time (assuming the most aggressive outlying tick in prices is the baseline for those rate sheets). That should offer a fair amount of insulation against reprice risk, but falling through the morning lows would naturally increase those risks. As for now, we're livin' on the edge.

The fact that Treasuries are not exhibiting the same weakness lets you know that we're not dealing with a major, underlying market-mover here, and more likely the weakness is related to month-end tradeflows and another potentially big day of supply for MBS.