MBS MID-DAY: What's Bad For Mario And Luigi Is Good For MBS

MBS Pricing Snapshot

A full-scale risk reversal is underway as Italian election polls stream in, showing center-right candidate Berlusconi with a marginal lead. This runs counter to previous expectations and even to early polling figures suggesting center-left Bersani would get the nod.

The effects on bond markets have been everything we'd expect from any sort of "Berlusconi > Bersani" information in that it's grounds for a bit of flight-to-safety buying in Treasuries and Bunds at the expense of Italian debt and equities markets. Everything has been shockingly logical thus far, but we don't yet know how much more room there is to run if the Berlusconi lead extends or how much bounce back into weaker levels we'd see if it evaporates.

US 10's are down to 1.9653 and Fannie 3.0 MBS are up to 'unchanged' levels at 102-31+. For an idea of the pace of the movements, since bottoming out at 4.19 after the first polls, Italian 10's are up to 4.34 now (as these move higher, German and US debt tend to move lower).

Italian election results are generally living up to the hype with markets breathing a collective sigh of relief after the first exit polls show austerity-friendly Bersani with a wide enough lead to form a government. Polls closed at 9am Eastern time and Italian 10yr yields dropped from 4.3 to 4.24 in just under 3 minutes.

Throughout the overnight session Italian 10's have been in an almost perfectly inverse tango with German and US debt with the latest move hurting Bunds more but lifting US 10's over 2.0%. Clearly, markets were waiting for elections results more than anything this morning and clearly, a Bersani victory hasn't been fully priced in.

10's are currently right at 2.00% and Fannie 3.0s are down 6 ticks on the morning at 102-26 after opening at 102-27 and trading a narrow 3 tick range so far. S&P futures are up nearly 10 points from Friday's 4pm levels.

There's no significant domestic economic data today and Italian elections are expected to continue to be the morning focus. As we've noted, Bersani should have been largely priced in so we don't necessarily expect a challenge to the higher yield ends of the range in 10's, but there may be some additional volatility before (and slightly after) election results are confirmed.