MBS RECAP: Big Rally (Back to Unchanged)

MBS Pricing Snapshot

Silly bond markets! They'd gotten a bit overzealous heading into today's auction with 10's ratcheting down to 2.035 for what seemed like "no good reason." Same story in MBS (in fact MBS may have been the culprit for the bullishness in Treasuries) as production coupons started heading north just after 12 noon.

There likely had to be one big buyer to get that party started, but after that, a quick check of the facts reveals the MBS levity to be a "coulda had a V8" moment. Clues were in higher coupons which have been rallying better than lower coupons on the day, and performing better vs benchmarks since NFP.

After this morning's ground-holding in Treasuries following Jobless Claims, mortgages began tentatively inching higher (BUT AGAIN, THIS WAS MORE APPARENT IN HIGHER COUPONS). That led to a situation where the price between Fannie 3.0s and 3.5's was as wide as it has been since NFP day, and provided a clear technical signal that "if Treasuries are going to hold their ground, it's time for 3.0s to catch up."

And that's what they've done with prices now down only 3 ticks on the day at 102-11. Wait... What? Yes, MBS are still down on the day, as are Treasuries. It's all part of the "hurry up and wait" sideways range between 2.0 and 2.075 in 10yr yields that's prevailed since NFP. MBS saw that we weren't going to test 2.075 this AM after stronger Claims data and bond markets in general, got the green light from an absence of a runaway stock rally and here we are: right back to the mid-point of the week's range in 10's and right back to the mid-point of the week's range in MBS. It feels more abrupt in Fannie 3.0s because it has been (relative to 3.5's anyway).

All that having been said, we're up enough from opening levels for positive reprices. A few have already come in. 10's are at their lows of the day, but there's been tons of short-covering, so it all reeks of a return to range-bound neutrality for now. Further facilitation of the rally past, say, 2.02 and especially past 2.0% in 10's would need something tangible. MBS, on the other hand, have some room to tighten, both vs Treasuries and vs themselves (3.0 vs 3.5s are 'allowed' to get back at least to a 2 and a half point gap before reassessing). In other words, we could see moderate additional gains, which would keep positive reprices on the table, but aren't expecting a big rally. All efforts are likely to be capped by 30yr WI's floor at 3.229. For reference, those just made it to 3.232, so we're getting close to out of steam, if not there already.