MBS RECAP: Coasting Out in Slightly Weaker Territory

MBS Pricing Snapshot

Although there's a chance that not every lender will be affected, negative reprices are now "likely" vs "possible." As indicated in the previous alert, when 10yr yields broke their supportive afternoon ceiling, MBS followed and both Fannie 3.5s and 4.0s are through to their lows of the day (-12 at 101-03 and -8 at 104-02 respectively). We could see this trend bounce or accelerate after the 3pm Treasury close, and would continue to emphasize that nothing major or epic is occurring here with respect to the big picture, despite the increased reprice risk intraday.

Compared to the last round of weakness in MBS, this one is a bit more disconcerting even if not "full-blown" by any means. Fannie 3.5s are back to their pre-auction lows and 4.0s are more than a tick below theirs. At this point, negative reprices are moving from "unlikely" to "possible" among a small group of lenders.

Fannie 3.5s down 9 to 101-06. Fannie 4.0s down 7 to 104-03. 10yr yields are up 2.6bps at 2.51. This is actually rather important as 10's have held this 2.51-ish ceiling since 11am, but will have to make a decision soon. Breaking higher would add another layer of risk to the reprice situation for MBS whereas firmly holding ground could temper it.

Just a "heads-up" alert for most lenders and possibly a reprice alert for one or two of the "early crowd" lenders. Prices of both Fannie 3.5s and 4.0s have come off a quick 4 ticks (.125). Volume and liquidity are light. There is no headlines causality and regardless of how it may look on the chart, this is NOT a directional mini-snowball. 10's are already bouncing and MBS might as well (if they can manage to scrape together a trade or quote in this environment).

Negative reprices are fairly unlikely here, but below here, things would start to get more legitimately risky. Sit tight if you can and wait for next move (if any!) after 2yr Auction.

Stocks continue sinking, even if only mildly, providing one of the few sources of inspiration for otherwise uninspired bond markets. Even then, Treasuries and MBS aren't willing to follow the same pace of change vs overnight trading levels. In other words, equities are back to yesterday's 10am levels whereas 10yr Treasuries would need to drop to 2.47 to achieve a similar feat.

If anything, Treasuries are showing their greatest resistance to the 'stock lever' here at the end of Fed's daily buying or "POMO" (Permanent Open Market Operations), and it's not uncommon to see a bit of extra weakness right around 11:02am for that reason.

Additionally, we run some risk of remaining under pressure in general ahead of the 1pm 2yr Note Auction. In terms of 10yr yields, 2.50 has blocked further progress so far and 10's are back to to 2.507. Fannie 3.5s are down 5 ticks on the day at 101-10 and Fannie 4.0s are down 3 ticks at 104-07--both near their highs of the day and both under the same implied pressure as Treasuries. Bottom line: near best levels on both accounts, but at risk of having those levels become resistance to further gains.