MBS RECAP: Stronger Into Auction, Weaker Out

MBS Pricing Snapshot

Treasuries are backing up from their 12:30pm low yield levels with the 1pm auction being the major catalyst. We wouldn't characterize the movement as anything more than "incidental" as Treasuries are already past their official close for the day at 3pm and the focus is on stocks heading into their 4pm official close.

Reprice risk is "probably contained" because prices are only 3 ticks lower from the most aggressive lender rate sheet pricing times at maximum. That means that the pure different in prices doesn't justify even an eighth of a point drop, but some lenders get "spooked" by these sorts of late day trends.

Bottom lines: If we lose another tick or two, reprice risk picks up just a bit. If we hold steady or improve, it's more of an outside possibility that's heavily dependent on individual lender considerations. More than anything, this is a heads up to let you know we're at the lows of the day, post-9am.

Keep in mind that markets are trading "when-issued" 10yr Treasuries behind the scenes in increasing amounts leading up to auction time and that the yields are different than those seen on regular (or "cash") 10yr Notes. We raise this point to make the following: whereas cash 10's didn't quite make it back to their 1.771% level that acted as a floor this morning, WI 10's bounced perfectly on their analogous level of 1.815.

This bolstered the case for technical support coming back down in yield. In cash 10's, the bounce was at 1.769. The supportive bounce didn't result in an immediate or significant move back in the other direction, but was enough to give some support to broader bond markets including MBS. Treasuries only rallied back about 1bp before heading back toward the supportive ceiling. MBS mimicked the move by moving lower in price to 103-31+.

That second attempt at a move into weaker territory met with similar support just now (meaning that WI 10's bounced before they even made it back to 1.815 and cash 10s only hit 1.767 this time. But like last time, there's still not that "convincing" move back into positive territory.

Long story short, there is good evidence for buying and selling interest on both sides of the market, post-auction. Despite the initial move weaker, things have leveled off nicely (maybe even positively). This is helping MBS continue to bounce on the 103-31+ floor and keeps reprice risk well at bay.

The "high yield"--the most important part of Treasury auction results came in 1.4 bps higher than expected (expectation based on the "when-issued" yield at 1pm. Read ALL about this Treasury Auction Jargon HERE). Bid-to-cover, a measure of the overall level of demand, was on pace with other Refunding auctions at 2.7. This may be viewed less favorably by certain pundits who are holding it up to the standard set by reopening auctions which average 2.9.

The first move for bond markets has been weaker, but not catastrophically so. 10's are up to 1.771 currently and Fannie 3.0s are down a few ticks to 103-31+. We're not into "reprice territory" yet, but neither are we necessarily done with the post-auction movement. Stay tuned...

This is the less common variety ("refunding") that creates a new security (as opposed to "reopenings" which just add more $$ to the issuance created by the "refunding"). Refundings' average stats are far worse than reopenings. Vs. a broader average around 2.9, refundings only average around 2.7 in bid-to-cover.

They also tend to come in higher than the 1pm "when-issued" yield, which is currently 1.798 at 1pm. Any "high yield" that comes in lower than that is good, and any beat of the 2.7 Bid-to-cover is similarly positive.

Volume in Treasuries and European markets continues to ramp up for the week. Black box buying led a charge back down from 1.80% earlier this morning in 10yr yields. Positions from that moved were squared up heading into the 9am hour and bond markets sat sideways waiting for the next move.

That move came in just after 10:30am and was at least partially motivated by a technical break of yesterday morning's low yields at 1.77. Too, the Fed was conducting their daily buying operation at the time, which can always cause an extra bit of movement between 10:15 and 11:00am. The move past 1.77 brought in more buyers despite the advancing stock prices. Europe got on board at 10:45 as Bunds mimicked the technical break they say in 10's.

The most striking thing about this morning's sharp-ish movement is the bigger-than-usual divergence between stocks and bonds. Both have unquestionably rallied since 10am. This could be a factor of soothing ECB "stand ready to act" kind of speeches from both Asmussen and Mersch. While the names aren't of importance to MBS fans in the US, their message could be taken to imply more aggressive easing in then near term future. That's definitely the sort of thing that can benefit both equities and bonds simultaneously (and indeed, it's that "sort of thing" that's broadly contributed to the longer-term divergence in US stocks and bonds.

There are less complicated explanations, to be sure, including the fact that today's move--when viewed in the context of the few days, currently looks like a simple rejection of a 1.787 ceiling (of course 10's were briefly higher than this, but that is like the "test" of the breakout. Most of the bounces have been at 1.787. The failure of the breakout 'test,' would also help explain the rapidity of the move back in the other direction).

MBS have largely watched and observed the post-10am swings, but have done their best to come along for the ride. Fannie 3.0s made it a few ticks higher on the day now to 104-03, but just ticked down to 103-31+ as this was being written 10's bounced at 1.755 up to 1.759 in good volume.

The next major event is the 10yr Note auction at 1pm and preparations for this could be part of this recent resistance to further gains. That said, markets are aware that this week's new Treasury supply is net-negative (maturing Treasuries paid back + Fed buying > week's auction needs), so further pre-auction weakness isn't a foregone conclusion.