MBS RECAP: Built up to be Let Down

MBS Pricing Snapshot

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.

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.

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.

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.

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.