MBS RECAP: Reversal Of Fortune On Small Scale

MBS Pricing Snapshot

The refreshing afternoon swim continues for bond markets, which have been moving one direction in the pool on the deck of cruise ship heading in another direction.

Treasuries have been the star of the show this afternoon as moderate slide lower in yields turned into a mini-snowball of short covering bringing 10's quickly from 1.90+ to 1.87. There was a moderate amount of volume behind the move, but nothing compared to this morning. Still, it wasn't the kind of late Friday move we sometimes see where low volumes are exacerbating a move in one direction or another.

Whatever the case, it was enough to catch the attention of accounts who were betting on higher interest rates, forcing them to cover their short positions, which temporarily added to the positivity. Things seem to have leveled off for now at least and 1.868 was as low as 10yr yields made it before heading back up to 1.877.

There's been a bit of a sideways grind between those highs and lows, but without any meaningful drive to or below the mid 1.86 technical levels, we're just looking at the best possible short term gains within the longer term "ominous" trend (which is the breaking and revisiting of the 1.865 inflection point only to bounce higher).

If Bernanke or other events prove to be super helpful on Monday, this technical battle still might not be over, but even then, there's little that bond markets can do in the short term to disprove the longer term, very slightly upwardly sloped trend in rates beginning in the summer of 2012.

Enough of that gloom for now... Just keep it in mind when considering longer term strategies. The more timely news is that lenders are indeed repricing positively. Fannie 3.0's continue grinding sideways around 104-06 (February coupons) and the longer those levels are maintained, the more lenders may come into the pool for a positively revised rate sheet. That said, the late-day rally looks like it's already run its course. We'll let you know if it makes another appreciable move in either direction, especially if there's a pricing implication.

Fannie 3.0s just hit their highs of the day, up 2 ticks at 104-06. Depending on when lenders printed initial sheets, this could be enough for some to consider positive reprices, but we're still in the early moment of the rally.

The move to the upside follows the resolution of competing trends in broader bond markets that's seen 10yr yields move back below 1.90. German Bunds wrapped up trading at Noon EST and US 10's broke from their indecisive range trade shortly thereafter.

All of this movement is occurring in a wider range, with much bigger participation near the highs and lows. So we can't draw any big picture conclusions from the current amount of green on the screens (the only conclusion today was that 10's bounced supportively at 1.928 and that Europe suddenly "matters" again). But even if it's only a swim in the pool on a cruise ship heading the wrong direction, the water feels good today.

Overnight low yields in 10's are 1.88. If we make it below there, we'll talk again. For now, moderate positive reprice risk and no change to bigger-picture defensiveness heading into the weekend.