MBS RECAP: Falling Knife Landed, Got Kicked, Now Falling Again

MBS Pricing Snapshot

Whereas 10yr yields are just now breaking their highs of the session, MBS have already made new lows and have been trading in an increasingly 'sloppy' fashion since 3pm. Liquidity can always be a factor late in the day for MBS, and especially after the 3pm Treasury close. Fannie 3.0s are now down to 102-19+ from their 102-22 perch earlier. 10's up to 1.9626 in volume that's not necessarily able to be shrugged off as "light." This could be enough to bring a few more negative reprices in this afternoon.

Some housekeeping: in addition to the previous 3 reprice alerts, here's another. Fannie 3.0s are at 102-23, 2 ticks below the "highly likely" reprice level of 102-25, and we've seen most lenders reprice already. If you haven't, you probably will, and many will be back for a 2nd round.

Now for the promised "more to follow" from the previous alert:
All the focus seems to be on stocks in the media, and headlines seem to lean on equities as an explanation for bond market weakness. Of course, there is that pesky little instance of stocks hitting all time highs at the beginning of the month while Treasuries had trended down to their best yields in 5 months. This isn't to say that the intraday movements of stock prices and bond yields don't correlate a lot of the time. They certainly do, but to simply look at higher stock prices today and blame them for the higher bond yields is to grossly oversimplify the state of affairs.

Speaking of states of affairs, EU states are a factor in today's bond market weakness, though not the only one. Between Italy issuing a new 30yr Bond, Greece being upgraded by Fitch, and Spain pricing a massive sovereign deal, Europe is certainly contributing to the 'risk-on' pressure for US Bonds. As a sort of addendum to the EU happenings, Japanese investors are said to be favoring French sovereign debt over US debt, as it's providing a higher hedge-adjusted yield. ALL that "stuff" happened while Treasuries were on the rise.

Domestically, and as previously noted, the daily Fed buying operation revealed a hefty line-up of willing sellers. When we're talking about bond markets and "sellers," the implication is that of excess SUPPLY. More supply = lower prices = higher yields. Not only was the supply on the high side, but the Fed's buying was concentrated in such a way that left a high number of participating accounts with excess inventory. Buyer's market in bonds = not good for low rates.

All of this is occurring in the looming shadow of next week's FOMC Minutes, which quickly morphed into a sort of bogeyman after last week's "QE might be tapered and the Fed has a plan" panic. Thank you Hilsenrath and ZH. Markets have taken that ball, to a large extent, and run with it. All this fails to acknowledge that--from a bigger picture perspective--the recent badness was A) historically likely to occur based on rally trend ended by a super surprising NFP and B) that we're merely moving back into the previous trend area. In other words, years from now, the past two weeks will just look like another ebb and flow within a broader trend. Whether or not that trend continues to look like an uptrend in rates, remains to be seen.

Bottom line: there's a lot going on today, even if it only seems like Stocks and Bonds are higher together for no apparent reason.

Fannie 3.0s at 102-25, 10's testing a break above 1.94. Negative reprices have now officially gone from "possible" to "likely" for most lenders. More to follow...

Given that MBS are still breaking even on the day, there are likely a lot of lenders who would not end up repricing at current levels. That said, we're now more than 4 ticks from known rate sheet print times, making it a possibility for the 'early crowd.' Fannie 3.0s's are unchanged on the day at 102-29 and down 4-5.5 ticks from levels that prevailed from 9:30-10:30am.

10yr yields pivoted higher past their 1.916 inflection point and are at 1.924 currently. Supportive ceiling potential is more ambiguous in this range, but 1.9281 has several instances of support yesterday and one just now. After that, there's no recent track record for anything until we hit 1.94.

This isn't necessarily a full-scale red alert, but another incremental increase in risk. For the record, full-scale red alerts would more likely coincide with a break below 102-25.

Bond markets have been trending weaker since 10am, but so far have seen support near session lows. 10's are currently breaking above 1.916 (1.922 now), which is a good short term pivot, having come into play significantly yesterday. A marked break higher could pose challenges for MBS holding gains (again, it looks like this is underway)

Those gains have already dwindled during the selling trend, even if only by 3 ticks. Fannie 3.0s are 2 ticks higher on the day at 102-31 but hit 102-30 at their lows. Any break below that would continue the selling trend at which point, negative reprice risk would start coming into view for some of the "early to act" lenders, especially if rate sheets were out closer to 9:30am than 10:30am.