MBS RECAP: Gains Largely Intact After Wild Ride; Pre-NFP Conundrum

MBS Pricing Snapshot

The 'price leader' just repriced. We have a band of prices set up on the chart on the dashboard from 100-23 to 100-20 that we'd consider to be the first stages of the negative reprice risk zone for lenders that repriced at the highs. Fannie 3.0s are currently in that zone at 100-22 and hit 100-21 moments ago.

ALSO, keep in mind that lenders are probably taking a lot of locks right now and some of them have, in the past, been more aggressive to reprice for the worse in such cases. This afternoon feels like a prime opportunity for pipeline control reprices, so stay on guard regardless of MBS Price action, especially if you know the lender has a past precedent of such pipeline control reprices.

For a day that looked as if it was merely "to be endured" for weary bond markets ahead of NFP, it's turned out to be the most significant rally of the week, nearly matching May 29th's barn-burner. To make matters more interesting, there is no singular event to "blame" for the positivity (and as far as we've seen/heard it's increasingly likely to end up being chalked up to team effort of factors)

Here's a list of some of the potential factors with brief discussion to follow:

- Dollar/Yen reached a critical support zone in the 98.8 zone, and has been trading in the same sort of 'stair-step" pattern all year without meaningfully "stepping back down." 98.8 was the line of demarcation suggesting the first such step down could be in process. Once that technical zone was breached, USD/JPY launched into it's biggest one-day move in several months.

- Eurodollars followed the move (both currencies strengthening vs the dollar). Euros had their own reasons for strengthening (Draghi press conference further supports the notion that the EU won't print money. Euro likes...) but those same reasons suggest tough roads ahead with deleveraging and economic weakness.

- This putting together of 2 and 2, was a slow realization for market watchers as big trades started to pepper the US Treasury complex, which was already in "buy first, ask questions later" snowball mode.

- The snowball got a major push from 2.06/2.07 being broken in 10yr yields, a significant entry point to an even more significant technical zone stretching down to 2.04, and ultimately 2.0, even. The latter was effectively 'tested' today as 10's hit 1.999 for a second or two, but 2.04 looks to be the modal floor. Technicians will take note of yield levels at 3pm to assess longer term trend changes, but would ultimately need tomorrow's action to confirm them anyway.

- MBS Joined in the snowball!!! We've been talking incessantly about the disturbingly wider spreads in MBS and how the cart can lead the horse when MBS are weak enough (convexity selling in MBS dragging down prices in Treasuries), and now the REVERSE is happening today. We've discussed 2.10% in 10yr yields as one line in the sand, below which MBS have tended to look more optimistic. So the good times were already rolling for mortgage markets even before the bigger swing heading into the noon hour.

- Once the bigger swing hit, "more of a good thing" for MBS turned out to be just that, and the rally kept pace astonishingly well (in fact, this is one of the only instances where you'll see little old mortgage markets outperform a global risk reversal snowball's effect on Treasuries. Mark your journals!

- Speaking of global risk reversal snowballs... Yeah... that. It's not fun or glamorous, nor does it make for sexy media headlines the way a big piece of data does, but these snowballs can do this. The longer they continue without great explanations, the bigger they can get, further confounding attempts to explain them. To this end, the words in this morning's opening update, (published 2 hours before the crazy swings) are now unbelievably relevant:

"There's no remaining significant economic data today, leaving tradeflows (jockeying for position and BASING TRADING DECISIONS OFF THE OBSERVATION OF OTHER TRADES) and technicals (TRADING BASED PURELY ON TRADING LEVELS, WITHOUT REGARD FOR ANY FUNDAMENTAL DATA) to guide the price action for the rest of the day."

Sometimes the clearly delineated scapegoat for these kinds of moves just doesn't exist. I know that's a tremendously unsatisfying answer in what seems like a world of mathematical decisions and correlations, but it happens. Think of it like a murder case with overwhelming circumstantial evidence yet no murder weapon. Most of the circumstantial evidence is listed above, but the case isn't closed until tomorrow's witness is called to the stand at 8:30am (meaning that NFP could either confirm everything that just happened, or reinforce the 2.04-2.07 pivot zone in 10's. Looks like we'll be up in the air until then, but not without tons and tons of positive reprices to consider beforehand).

Fannie 3.0s and 3.5s are both back in line with yesterday's highs as Treasury yields fall to test the evergreen pivot point at 2.07. Several positive reprices have already been reported and more are likely if we don't reverse gains in any meaningful way.