MBS RECAP: Moving Gently to Week's Highs After Auction

MBS Pricing Snapshot

Treasuries have calmly rallied under 2.60 and MBS have even more calmly followed. That's about it. Volume is extraordinarily low for MBS and it took very little effort for those inclined to squeeze Fannie 3.5s and 4.0s to their highs of the day just after 2pm. It's taking very little effort to push back now that Treasuries look to have bottomed out (whether temporary or for the rest of the day, remains to be seen) at 2.587. Even so, if we can hold these extra few ticks of improvement, a few more lenders stand the chance of repricing positively (emphasis on "few" and "chance"... We're not looking at widespread positive reprice guarantees on this move).

As noted, the low bid-to-cover at 2.45 was to be expected. While a little bit lower than our "decent" category (which was 'anything over 2.5'), it's near the upper end of the "acceptably weak" category of 2.3-2.5). The real star of the show was the high yield which stopped through 1 bp at 2.620 vs a 1pm WI of 2.621. This is more impressive than it sounds due to the fact that 10's rallied into the auction (as opposed to building in a concession).

10's are down at 2.604 currently and were slightly lower (2.602) moments ago. There hasn't been any sort of frenzied rally response, but it's just "nice" for now. Volume is steady. The improvements are nominal, and MBS aren't completely ignoring the supportive environment.

Fannie 3.5s are up a tick since the auction at 100-26. This is roughly 4 ticks from prices that prevailed during some lenders' rate sheet print times this morning and introduces a mildly increased chance of positive reprices among a VERY small group of lenders. Those prospects could increase if we spend more time holding these levels, but several more ticks of improvement would be required before positive reprices became more likely.

The following contains weird words and abbreviations that are further explained in this Brief Discussion of Treasury Auction Jargon ).

This is a REFUNDING auction which happens once every three times (the other two being REOPENINGS). They're stats differ a bit as follows:

- Refundings tend to have slightly lower bid-to-cover, but that gap has closed recently. The last refunding was 2.70 which was high at the time. The previous 3 were 2.68, 2.59, and 2.49 respectively. The last 2 reopenings were 2.57 and 2.53. It'd be fairer to expect today's BTC to be there or under. In other words, anything over 2.5 is decent. 2.7 or more would be quite strong. 2.3-2.5 would be acceptably weak and sub 2.3 would be scary.

Refundings are less likely to "stop through" the 1pm "when-issued" (hereinafter: "WI") yield. In fact, none of the last 4 auctions have stopped through and the last 4 refundings have tailed (come in higher than 1pm WI) somewhat significantly. WI is currently 2.623, but we'll update it in chat in a few minutes.

The strength or weakness of the auction is more about the yield than the bid-to-cover. Indirect demand can tell us something as well (somewhat of a proxy for foreign demand) and has been around 35% for refunding auctions.