MBS RECAP: Old-Fashioned Rally On US Economic Data!

MBS Pricing Snapshot

RTRS-U.S. DEFENSE SECRETARY HAGEL CITES "REAL AND CLEAR" DANGER FROM NORTH KOREA, U.S. WORKING WITH CHINA, OTHERS TO DEFUSE TENSIONS

Treasuries surged on this news, not at their highest volumes or fastest pace of the day, but in a clearly correlated fashion. The move brings 10yr yields to their lowest levels of 2013. We've seen a few breaks into the high 1.79's so far and are currently at 1.8055.

It's too much to ask of MBS to keep pace with an 18 tick price rally in 10's, but the fact that we have 11 ticks in the green is fairly acceptable, and keeps us from breaking above recent limits in terms of yield spread vs Treasuries. That 11 tick gain puts Fannie 3.0s at 103-17. At this point some lenders may just be waiting for the gains to level off before repricing, though we did see a few after the last alert.

At the risk of implying that today's rally is primarily due to North Korea news, we'd emphatically say that "it's not." The news wire helped a process that was already in the works, but by now means created it. Europe fears... range exploration in bond markets... Treasuries getting caught up with Bunds... Signs of a broader shift in asset-allocation trade... 3 central banks report tomorrow... 2 reports today adding major negative anecdotes to Friday's NFP picture... All of these things are creating a quick move to play defense against the possibility that markets continue making broader shifts fueled by lackluster risk cues from tomorrow's central banks and most importantly against the possibility of a big NFP miss.

This could quickly bounce back the other way, or it could mark a shift that results in a test of the long term uptrend in yields--a battle that would be fought around 1.75% in 10yr Treasuries. Either way, it seems to present a good opportunity to take risk off the table ahead of big-ticket events, especially if you see one of the positive reprices that should be on the way (if you haven't seen one already).

Treasury futures activity picked up rather aggressively between 12:40 and 12:50, coming to a head right as 10yr yields met with their previous lows. The next tick lower in yield caused an immediate tradeflow-driven move down to 1.807, essentially retesting the lowest yields of the year.

At 103-16, MBS can't even come close to saying they're near their best levels of the year, but they've nonetheless managed to participate reasonably well in today's Treasury-led rally. Fannie 3.0s notched up to those new highs right at the same time, and have held that ground long enough that a few more lenders may be considering positive reprices.

Keep in mind that the reprice potential is probably more limited than it "feels" like it should be based on the "+0-10" on the day or the shape of the charts because most lenders released their first rate sheets after the bulk of the morning's rally.