MBS RECAP: Built up to be Let Down

By: Matthew Graham
MBS Live: MBS Afternoon Market Summary
After a brief pause for reflection following yesterday's 3yr auction, bond markets were back in business and actually able to begin the session right at Tuesday's closing levels.  After another pause for reflection this morning, the 'building up' continued from the equities open at 9:30am right up to the the 1pm Treasury auction (best prices of the week for July 3.5s).  MBS volatility began to pick up right before the auction results and proved to be either lucky or clairvoyant as markets ultimately went out the door very close to those levels, despite the fact that they had all the trappings of outlying quote activity earlier.  As for the auction itself, it was a mixed bag, and despite the volatility in MBS, prices heald for nearly two hours before slipping away into the afternoon.  On the Treasury side, the 2.18 technical level continues to be a real problem, and potentiall ominous depending on tomorrow's activity.  Today marked the second significant bounce on 2.18 as a floor.  Until this week, 10's hadn't closed higher in over a year, hitting 2.179 on Friday.
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
FNMA 3.0
99-24 : -0-09
FNMA 3.5
102-26 : -0-09
FNMA 4.0
104-28 : -0-07
FNMA 4.5
106-09 : -0-04
GNMA 3.0
101-06 : -0-11
GNMA 3.5
104-08 : -0-09
GNMA 4.0
105-20 : -0-05
GNMA 4.5
106-07 : -0-06
FHLMC 3.0
99-13 : -0-09
FHLMC 3.5
102-20 : -0-10
FHLMC 4.0
104-24 : -0-07
FHLMC 4.5
105-12 : -0-03
Pricing as of 4:04 PM EST
Afternoon Reprice Alerts and Updates
Below is a recap of instant Reprice Alerts and updates issued via email and text alert to MBS Live subscribers this afternoon.

3:37PM  :  ALERT ISSUED: Leaky Afternoon; Just a Bit More Reprice Risk
Both sides of the market to be packing up and going home after 2pm. Trends into weaker territory for stocks, bonds, and MBS have been ongoing since then with the latter now at new lows for the day. This makes for yet another incremental increase to negative reprice risk.
2:48PM  :  ALERT ISSUED: MBS Hit Lows. More Legitimate Negative Reprice Risk This Time
While prices still aren't far enough below rate sheet levels for a majority of lenders to reprice for the worse, we have a few factors suggesting increased negative reprice risk.

Fannie 3.5's are at the lows of the day (post auction shows lower prices, but the spike suggests it was an errant bid vs real trade), currently down 5 on the day at 102-30. We've been unable to dig out of the small post-auction slump. 10's are testing their overnight highs and just broker post-auction highs. And of course, we're nearing the more tenuous, less liquid, late day trading hours.

Bottom line, the weakness still isn't enough to get every lender involved in a reprice, but it's slightly more possible than it was at the last alert.
1:13PM  :  ALERT ISSUED: MBS Volatility Around Auction; Reprice Risk Dilemma
Moments before the Treasury Auction results, MBS volatility picked up and quotes started flying fairly far from reality's probable mid-point. While we did see a majority of that volatility correct already, there's no guarantee it won't return.

The auction itself was very much middle-of-the-road, albeit on the weak side in terms of demand. The yield, however, was right on the money, and that's the most important factor (usually) in any auction, as long as other metrics aren't completely out of line.

That said, 10's are weaker since 1pm, and just ratcheted a bit higher after initially holding their ground. MBS look to be under some slight pressure as well after correcting from the initial bounce, but post-auction volatility is still working its way through both sides of the market.

Unfortunately, there is some negative reprice risk here, but it's one of those situations where we might see none, and where volatility could be resolved in our favor by the time you read this. As of this moment (1:12pm), it looks like that bounce back is more possible than a scary slide, but of course, we'd update you anyway if such a slide were encountered.
12:54PM  :  10yr Auction Preview
For those that need it, a refresher on Treasury auction jargon and significance can be found HERE.

Today's auction is a "reopening" of the new 10yr security created on the 5/8/13 auction. Reopenings have come in at lower than expected yields half the time over the last six examples (ranging back to 9/12/12), but have done so by larger amounts on average.

"Expected" in this context, refers to the 1pm trading level of the "when-issued" 10yr yield. It's slightly different than the cash 10yr yield on screens, and for instance is at 2.202 right now vs 2.1973 in cash. It's the 1pm level that matters however, and we'll update you on that in chat and/or a recap if the auction moves markets.

Reopenings also tend to have higher bid-to-cover ratios vs refundings (about 2.95 vs 2.70). This is simply a measure of overall demand in terms of dollars bid vs dollars auctioned.

Indirect bidders have accounted for roughly a third of recent reopenings, and have been trending lower since the apex of EU panic.

Auction results tend to come out around 1.5 minutes after 1pm, though 1pm is the official bidding cut-off.
12:00PM  :  ALERT ISSUED: Unified Move Away From Risk; MBS Move Into Positive Territory
Stocks, Treasury yields, Yen/USD, USD/EUR... All falling sharply. MBS have been rising since 10am, with Fannie 3.5s moving up from 102-30 to 103-06 currently. Given the popularity of the 10am time frame for rate sheet generation, it's no surprise we've already seen a few positive reprices. If we hold or improve upon currently levels, we'll likely see a few more.
Live Chat Featured Comments
A recap of the featured comments from the MBS Live Dashboard's Live Chat feature, utilized by hundreds of industry professionals each day.

Charles Tadros  :  "REPRICE: 3:07 PM - Provident Funding Worse"
Victor Burek  :  "I definitely feel like rates rose too far too fast"
Joe Daquino  :  "Just got a "mid day rate change" from secondary and I quote ---- "some products improved, some products got worse.""
philip mancuso  :  "My sense is that sentiment is starting to shift. The fact that we are now almost exactly at the pre 3 year levels after to below avg auctions indicates to me we've established somewhat of a bottom. I'm no longer short here, I got out. thoughts?"
Hamid Hamrah  :  "REPRICE: 2:14 PM - Chase Better"
Matthew Graham  :  "RTRS- U.S. FISCAL 2013 YEAR-TO-DATE DEFICIT $626 BLN VS COMPARABLE FISCAL 2012 DEFICIT $844 BLN "
Matthew Graham  :  "RTRS- U.S. MAY BUDGET DEFICIT $139 BLN (CONSENSUS $110 BLN) VS MAY 2012 DEFICIT $125 BLN -TREASURY "
Victor Burek  :  "same with VA...those should only be for buying or refi'ing to lower rate"
Matthew Carver  :  "REPRICE: 1:46 PM - Flagstar Worse"
Victor Burek  :  "i hope states change equity laws to match Texas...there is no reason why fha should allow a cashout refi"
Matthew Graham  :  "and I should clarify, not just 10's, of course, but they're the most ubiquitous benchmark for the longer duration fixed interest rate world. "
Matthew Graham  :  "10's set the tone, but MBS get rowdy periodically, sometimes even to the point of setting the tone, but diverging often enough that it pays to know when."
Matthew Graham  :  "yes, this is pretty much the perennial thesis of applying market movements to rates"
Daniel Cover  :  "@MG, you're not kidding. I've called a few pricing changes to colleagues since checking this out. A lot of 10year treasury guys in the business it seems. I suppose MBS tracks the 10? But not always a 1 for 1 correlation? "
Ted Rood  :  "exactly, MG. Love it when agents ask me how I know pricing is going to change."
Matthew Graham  :  "@DC, I think most vets in here would say you're typing in one right now."
Matthew Graham  :  "really CS!? you pay for MBS Prices earlier than we give them to the public on MND"
Daniel Cover  :  "All I want in life is an unfair advantage. "
Christopher Stevens  :  "I see nothing wrong with Reuters getting data early but for firms buy it in order to trade before the public seems a liitle wrong."

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