MBS RECAP: Contained By The Roll And Treasury Support

MBS Pricing Snapshot

This is a reprice alert of sorts, even if not yet the variety that hearkens widespread negative reprices. In fact, it's more of an early warning for most lenders considering we're only 4 ticks between highs and lows. That said, there are some disconcerting patterns forming with respect to the "fractal" relationships mentioned this morning.

The 3yr Auction, while weak, was inconsequential for movement in the longer end of the Treasury yield curve, and similarly inconsequential for MBS. Ahead of the auction, fresh headlines out of Italy (the "left field" region) indicated that Berlusconi and Bersani were beginning to talk about working together. The interesting thing about these headlines is that they came out of Bersani's camp--something that hasn't happened before (in fact, he's been militantly ANTI-Berslusconi). If this changes, it's bad for US bond markets, and did in fact, create a minor shockwave in Bunds and 10's ahead of the auction.

The auction itself produced no meaningful swings. Rather, a relatively well-connected stock lever is trying to pull Treasury yields higher, in the same way as yesterday, and thus far, doing an OK job of it. 10's are now over 1.75 and Fannie 3.0's are wavering between unchanged and a tick weaker on the day. Flows are light, given it's roll day, but any further swings toward "risk-on" (i.e. stocks and bond yields moving higher) could still put enough pressure on MBS that we'd care.

Right now, we're just sort of on the edge where only the earliest-to-act lenders are considering negative reprices.

MBS, Treasuries, and Stocks have all traded in eerily similar patterns to yesterday through the same time. This is characterized by an overnight session that starts sideways for Treasury yields and equities futures, with both moving up in European hours, dipping lower into the 10am hour, leveling off, and rising into the close.

Viewed from an MBS standpoint, both today and yesterday started with prices down several ticks and in both instances, rallying to +2-3 ticks improvement by 10am, then slipping from there. If the pattern holds, we're now entering that selling phase, but perhaps a better way to look at it would be to simply "stay on guard against headwinds" as we're still +0-01 on the day. These sorts of fractal relationships between various pockets of time on the charts is more of an interesting way to examine what's already happened as opposed to predict what will happen going forward.

To that end, technical support in the mid 1.73's (10yr yields) seems important. A break higher likely results on incremental pressure on MBS.

This afternoon's 3yr Auction isn't likely to be a big market mover, but the general unimportance of 2-3 year auctions will start shifting some time this year or next. Naturally, it will happen with 3's first (because markets care less and less about a Treasury security the shorter its duration--i.e. more like "cash" the lower the maturity). As such, we'll be tuned in at 1pm, but not expecting anything massive by way of reaction.

Between now and then, we're keeping an eye on 1.737 (right at current levels) in 10yr yields. That's been more of an incidental short term pivot while the 200-day Moving average is a bit higher at 1.743. Either way, MBS are at their weakest levels since before 9am and looking a bit pale. Stay on guard.