MBS RECAP: Weaker During Day, Overnight Rally In Progress

MBS Pricing Snapshot

MBS just legged down again with Fannie 4.0s down 12 ticks to 102-28 and falling. Stocks and bonds are both lower in price as well. "QE-off" trading. Negative reprices are incrementally more likely now and for a majority of lenders.

'Sharply Sideways' : high volume and quick knee-jerk swings in prices that remain contained by previous ranges. Why is that happening and what might happen next? In short, there are two big competing ideologies in the Minutes. One was in favor during the first 30 minutes of reaction, but the more negative (for bonds) could be taking over now.

In this corner: “many members indicated that further improvement in the outlook for the labor market would be required before it would be appropriate to slow the pace of asset purchases.”

In the other corner: "A number of Fed officials wanted to end the central bank’s $85 billion per month bond-buying program late this year."

Reading through the minutes initially, one is left with the sense that many on the Fed actually want the economy to be doing MORE than just holding steady if tapering is to occur. That passage occurs earlier on in the actual minutes themselves. But later in the PDF-only recap of the minutes, they note "half" the members want to end asset purchases later this year.

That seems shocking at first glance, but when balanced against the fact that those same members also agreed that asset purchases made sense for now, we're left with something that's not too different from what we already knew.

If anything, it's slightly more bearish than the knee jerk reaction into positive territory would suggest. Stay on guard here.

Full "QE-on" trading with both stocks and bonds rallying handsomely within the confines of today's range so far. MBS are taking a moment to wake up to that phenomenon, but 10yr yields have dropped 3bps. No directional breakouts yet though. More to follow with specifics from the Minutes.

For those who need the refresher: Brief Discussion on Treasury Auction Jargon and Significance.

Unlike yesterday's 3yr auction, today's 10yr auction comes in one of two varieties: refunding or reopening. Each has distinctive historical characteristics. Today's is a reopening, and thus should be measured against that set of past metrics. They are as follows:

- reopenings tend to perform better in terms of the final yield vs expected yield, averaging a moderate beat compared to refundings which have averaged a miss of almost 1bp.

- reopenings, until recently, had seen better bid-to-cover ratios (a measurement of overall 'demand'), but that trend has been thrown off by the previous auction just a bit. reopenings still have a higher bar to hit (and today's probably won't hit it) of roughly 2.85 bid-to-cover. Refundings have been closer to 2.70. Most recent auctions have been light in terms of demand, decent in terms of yield vs expectations, and heavy in terms of indirect bidding.

Indirect bidding for 10's was a whopping 51.7% last time vs an average for reopenings of 41%. Refundings average 36% by comparison.

Note: any mention of "expectations" or "expected yield," refers to the "when-issued" 10yr security which is slightly different than the cash 10's on this screen. Here at 12:58pm, when-issued yields are at 2.666 but the auction will be judged with the 1pm yield as a benchmark. Results come out about 1.5 minutes after 1pm.

Since the conclusion of the Fed's scheduled buying operation just after 11:00am , Treasuries have weakened a bit more and MBS gave up their attempt to move higher off 10am lows. Fannie 4.0s are now bouncing along the bottom of today's range (with the exception of a few brief ticks that were lower on the first batch of selling)--currently down 6 vs yesterday at 103-03.

Reprice risk was already on the table with the first round of selling and simply remains on the table now. More lenders may get involved simply on the premise of caution against further weakness. 10's are testing their highs of the day at 2.6664 and the 10yr auction is coming up at 1pm ET with FOMC Minutes at 2pm and Bernanke at 4:10pm.