MBS RECAP: Deceptively Stable Afternoon Following AM Sell-Off

MBS Pricing Snapshot

Bond markets just crossed the first finish line of the day in the form of the 3pm Treasury pit close. More than a few traders and analysts consider this to be "it" for the day as far as "bond markets" are concerned with the 3-5pm time frame being an unofficial 'after hours' session. It's potentially worth noting then that 10yr yields have managed to hold underneath a supportive ceiling at 2.60 (currently 2.5819).

In a similar vein, Fannie 3.5s look like they'll probably live to fight another day closing over their 100-00 pivot. This is the lesser of two evils today, in that it keeps the morning sell-off well contained despite leaving us a few ticks in the red, but it's not extremely inspirational in terms of solidifying the consolidation yet.

This is one of those things that may be beneficial today in that it curtails reprices risk--maybe even shifts it positively--but that has limited significance in deciding on a stance for tomorrow. For perspective, keep in mind that 10yr Treasuries actually just hit 3pm at their worst levels almost 2 years. Bottom line: everything's pretty OK since 10:30am, but we wouldn't read anything beyond that into it just yet.

The 2yr Auction came in with the same level of demand as the last one. At 3.05 bid-to-cover, this is lower than the 3.3-ish average of the past four auctions, but the btc has been trending lower since late 2011 and 2012 as the Fed's "low rates through 201X" verbiage wears off (short term auctions had their heyday while their maturities remained inside that time window).

The yield was modestly higher than the 1pm "when-issued" yield and indirect bidders were awarded the highest share of a 2yr auction since February 2012. Although the NY Fed has indicated that indirect bidding isn't a good proxy for foreign investors in shorter maturity auctions, high indirect %'s do line up with increased global uncertainty to some extent. It can also be indicative of a broad-based uncertainty as a wider variety of investors move toward the cash end of the spectrum.

The auction results didn't cause any major spikes, but there has been some slow-paced weakness since the middle of the noon hour. This looks more technical than "event-based." Volumes are down and equities have moved weaker over the same time frame. Conclusion: cautiousness increasing as the day winds down--not an uncommon phenomenon in general, but especially in recent weeks.

Most lenders who were at risk of repricing negatively earlier likely already have, but as Fannie 3.5s flirt with 100-00, the risk is smoldering. Same story for 10yr yields at 2.60, which is another good line in the sand to gauge potential shifts in risk. This higher yields move above there and/or the lower prices move below 100-00 in Fannie 3.5s, the more reprice risk would be increasing. Holding ground for now, but just barely.