MBS RECAP: Straightforward Sell-Off and Bounce-Back

By: Matthew Graham
MBS Live: MBS Afternoon Market Summary
Today's session offered a refreshingly straightforward level of connection between economic events and market movement.  Even in the overnight session, weaker Industrial output data and Italian bond auctions helped fuel demand for Treasuries.  This led to the best yields of the week by the time domestic trading got underway--fairly vulnerable to a strong Retail Sales print.  Even though the internals of the report mitigated some of the strength of the headline, excluding gas, autos, and building materials, Sales still rose 0.4 percent versus 0.2 percent expectations.  That prompted heavy selling in bond markets, but not enough to challenge previous yield highs in Treasuries or price lows in MBS.  In that regard, MBS held a bit firmer than the soon-to-be-auctioned 10yr Treasuries.  After the exceptionally strong 10yr auction, both MBS and Treasuries moved back in line with yeserday's closing levels, essentially casting an undecided vote on post-NFP momentum.  Jobless Claims tomorrow morning is the next scheduled consideration.
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
FNMA 3.0
102-12 : -0-01
FNMA 3.5
105-00 : +0-02
FNMA 4.0
106-10 : +0-02
FNMA 4.5
107-18 : +0-04
GNMA 3.0
103-28 : +0-03
GNMA 3.5
106-32 : +0-02
GNMA 4.0
108-21 : +0-04
GNMA 4.5
108-32 : +0-07
FHLMC 3.0
102-00 : +0-00
FHLMC 3.5
104-23 : +0-03
FHLMC 4.0
106-00 : +0-03
FHLMC 4.5
106-26 : +0-03
Pricing as of 1:23 PM EST
Afternoon Reprice Alerts and Updates
Below is a recap of instant Reprice Alerts and updates issued via email and text alert to MBS Live subscribers this afternoon.

2:59PM  :  Positive Reprice Potential Incrementally Improves
Just a quick note that the ball has generally continued to bounce in our favor post-10yr-Auction. Treasuries consolidated more than MBS, but neither backed up much before pressing on with another few ticks of positivity. 10's haven't resoundingly challenged or broken resistance floors, but MBS have inched back into positive territory nonetheless.

There too, we're not seeing a resounding challenge of opening highs, let alone longer term pivot ceilings at 102-16, but the incremental improvement keeps positive reprice potential alive for some lenders. Fannie 3.0s are currently unchanged on the day at 102-13, and this is essentially the cut-off point the leaves the door slightly open for reprices (more of a "possibility" than "likelihood" though, for lenders who haven't already repriced). 10's are down to 2.0209 which is quite a nice change of pace from the 2.05 before the auction, but still a bit troubling considering it's merely flat vs yesterday's latest levels. S&P's hit 1556 for the third day in a row and are currently at 1554 with an hour to go before the close.
1:17PM  :  ALERT ISSUED: Strong Auction Brings Bond Markets Back Toward 'Unchanged.'
Today's 10yr Treasury Note Auction was much stronger than expected or indicated by trailing averages. The bid-to-cover, a measure of overall bidding interest was 3.19 compared to the last 4 re-opening auctions' average of 2.97. More importantly, the auction's high yield was 2.2 bps lower than the 1pm 'when-issued' yield.

10's have snapped back to 2.0279 from just over 2.05 before the auction and MBS are up to 102-11 from 102-07. This brings both MBS and Treasuries back to levels just slightly better than their best "post-Retail Sales" numbers. In other words, we're only just passing the half-way point in getting back to opening levels by the time the 8:30am sell-off is considered.

If we sustain current levels, it would only be enough for a positive reprice from an extremely small contingent of lenders, but still a possibility. As of this very moment, WI 10's are testing a break below what had been some troublesome resistance that lined up with 2.0279. This could pave the way for MBS to solidify their gains here. and for cash Treasuries to improve. 2.0279 is an important intraday technical pivot. Moving lower = happy, moving higher or not breaking= disheartened.
11:35AM  :  MBS Bounce At Session Lows, Reprice Risk At Bay For Now
This is more of an update than a statement about increasing reprice risk. It's conceivable that lenders who priced right at the mid-morning MBS highs were beginning to consider a reprice when Fannie 3.0s hit 102-07 moments ago (as this was a 4 tick gap from the previous high of 102-11). Even then, the earlier weakness this morning acts as a sort of insulator against this relatively smaller shock (first drop of the morning was 102-15 to 102-07).

In other words, lenders who priced just after 10am at the MBS Price highs had the benefit of "knowing where we came from" earlier in the morning and likely didn't price as if MBS had been flat at 102-11 all morning.

Additionally, the revisit to 102-07 has thus far, been met with a moderate bounce. It's only 1 tick for now, but the move is shared by Treasuries and stocks. These are probably good places to look in the next hour and a half as we head into the 10yr Auction. 10's have essentially revisited their highs of the morning at 2.05, and are currently at 2.0454. If they break higher, even if by way of a pre-auction concession, MBS could follow suit with a break of their lows, moderately increasing reprice risk.

With respect to those eventualities, "so far so good" for now, but just a heads up that we're close to the edge, and the assessment could change fairly quickly if near term technicals get tested.
Live Chat Featured Comments
A recap of the featured comments from the MBS Live Dashboard's Live Chat feature, utilized by hundreds of industry professionals each day.

Robin Baran  :  "OO, the clock starts ticking from the deed transfer date, not the discharge date. "
Robert Hoffman  :  "Oliver I just had a similar situation and was told by my underwriter that the three year would be from the date the deed was filed."
Oliver S. Orlicki  :  "FHA Scenario: I have a borrower who filed a Ch 7 BK and it had a mortgage in it. The BK was discharged in DEC 09 and the deed transfer did not occur until April of 2010. Two questions: Does the 3 year period go off the BK discharge date or the deed transfer. Also, if another lender pulls his case # before the 3 year period, do this hinder his ability to get an FHA loan with another lender who takes application after the 3 year period has elapsed?"
MortgageMan007  :  "REPRICE: 1:52 PM - Interbank Better"
Bryce Schetselaar  :  "REPRICE: 1:44 PM - Sun West Mortgage Better"
Tom Schwab  :  "REPRICE: 1:32 PM - Franklin American Better"
Matthew Graham  :  "A+ after a relatively big morning sell-off isn't quite the same as an A+ that follows flat trading on the approach."
Jeff Anderson  :  "An A+ just isn't what it used to be."
Ted Rood  :  "we may still be under levels many lenders priced at this AM."
John Tassios  :  "Looks like a lot of foreign buyers still like our bonds / Repricing will take about 45 min to 1 hour or more, to let knee jerk settle and see what bonds do after 2:00"
Ted Rood  :  "No reprices just yet though."
Chip Harris  :  "give it a few"
Christopher Stevens  :  "seems like the mrkt was preparing for the worst got the best and basically we are still sideways"
Victor Burek  :  "a+ from rickster"
Matthew Graham  :  "RTRS - U.S. 9-YR 11-MO NOTES BID-TO-COVER RATIO 3.19, NON-COMP BIDS $20.25 MLN "
Andrew Horowitz  :  "very good auction"
Dez Loessberg  :  "10s look good"
Matthew Graham  :  "A+"
Matthew Graham  :  "RTRS - U.S. SELLS $21 BLN 9-YR 11-MO NOTES AT HIGH YIELD 2.029 PCT, AWARDS 70.31 PCT OF BIDS AT HIGH "
Victor Burek  :  "good one?"
Oliver S. Orlicki  :  "2.05 holding"
Matthew Graham  :  "Auction coming up. Average bid-to-cover has been 2.97 for reopenings (which today's is) and 2.67 for refundings. Reopenings tend to come in a little bit under the 1pm "when-issued" yield (which is akin to the "consensus" and also referred to as "WI"). WI is currently 2.052 to 2.051 here at 1pm. "

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