MBS RECAP: Straightforward Sell-Off and Bounce-Back

MBS Pricing Snapshot

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.

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.

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.