MBS RECAP: Modest Mid-Day Rally, Weaker Since Then

MBS Pricing Snapshot

Not much to report by way of material market movers. Movement itself continues to trend in the same direction it's been trending all day, with the 11am-1pm time frame of frenzied short-covering now standing out as a clear outlier to the underlying trend. 10yr yields are near their highs and MBS are at their lows, down 5 ticks on the day at 102-31. Negative reprices are incrementally more likely here for a handful of lenders. Nothing to warrant widespread panic.

As has been the case, the 3yr Auction had no impact on longer-dated Treasuries or MBS, though bond markets are selling off as if driven by an economic event (such as data or an auction). In truth, 10yr yields were already trending higher heading into the auction. The path higher was made easier by the fact that previous strength was merely the result of heavy short-covering on a technical break between 11am and noon.

A few bigger flows have been hitting in the past few minutes, essentially bringing 10's back in line with morning yield levels and washing out the short-covering rally. MBS are innocent bystanders, not moving around quite as much as Treasuries (themselves doing their best to avoid being overly influenced by fresh 5+ year highs for equities).

Fannie 3.0s are down 3 ticks on the day at their lows of 103-00 (actually, they briefly touched 102-31+). Whatever the case, negative reprice risk is slightly elevated--not necessarily because of the outright different in prices between now and rate sheet time, but because the trend is such that a few lenders may consider a preemptive reprice into the ostensible weakness.

It's important to keep your lender's specific past precedent in mind (to whatever extent you know it). Some lenders can't be bothered by a measly 4 tick trading range in MBS and are nowhere near considering a negative reprice. A very small minority of others may actively be considering it right now, simply due to the negative trending. It would take a few more ticks of a drop into the 102's for most lenders to consider it though.

earlier this morning, ECB's Draghi said "I think the term currency wars is way, way over done. We are not witnessing anything like that." That may be true, or it may be a matter of defining the word "war."

Clearly, global interconnectedness between currencies and markets is an increasingly hot topic for several years. This has been even more pronounced since the onset of the most recent phase of the EU Crisis beginning in late 2011. For instance, The long term low in the Euro in July coincided with the all-time low 10yr Treasury yield. Early February highs in TSY yields coincided with 14 month highs in the Euro.

The connectivity isn't omnipresent, and it's not rocket science considering the "risk-on / risk-off" trading patterns include the EU as well as the domestic economic and FOMC policy situations in the US. But central bankers--simply in addressing the term "currency war," give it more credence.

Euros surged in the early AM, and really set the tone for the day. Japanese officials commented on the Yen just before 9am creating a big swing lower in JPY/USD (stronger Yen) and there was a palpable response in bond markets (albeit on a much smaller scale).

Equities took over as the directional guidance giver of choice after the cash open, but the recent spat of Euro strength (on Draghi comments) helped stocks find their footing after 10:40am. Yields were following stocks lower until then and have gone sideways while the "risk-on" mini-bounce took place.

Scheduled Fed Treasury purchases just came through and this looks to be doing more good than harm at the moment with 10's down to 1.975. MBS, however, remain at their session lows with Fannie 3.0s down 3 ticks at 103-00, putting them more in line with the preexisting weakness in Treasuries that they'd, thus far been able to outperform. A caveat to this comment on Treasury stability: it's tenuous, and looks predisposed to keep a wary eye on equities and--though Draghi might be cranky about it--even currency gyrations.