MBS RECAP: Coasting Out Near Best Levels; Uneventful Post-Auction

MBS Pricing Snapshot

Post-30yr Auction, bond markets had been trading fairly uneventfully (and for almost all intents and purposes, still are), but Treasuries have just edged out of their consolidating ranges. These ranges stood a chance to make for an uneventful afternoon, but as they're broken, the pressure remains for MBS, keeping reprice risk in a sort of "maybe" equivocal territory.

These moves by no means suggest a majority of lenders would reprice negatively, but they raise a shadow of a doubt for a few lenders. We're just now witnessing the first few ticks of this phenomenon, so Treasury yields (which are more important to watch today due to roll-related illiquidity in MBS) would have to stay here or move higher for the risks to remain. Otherwise, this will end up being a slightly oversized test of uneventful late-day consolidation patterns.

This is not necessarily a negative reprice alert. Prices are currently no lower than they were just before the auction results, but they had drifted slightly lower heading into the auction. As for the auction itself, it was very weak with respect to the bid-to-cover metric, but as we suggested, this is an ongoing theme in the Treasury auctions since May. Markets seem to be taking it in stride fairly well. The yield award was a full bp higher than the 1pm when-issued yield. This isn't that big of a miss for a 30yr Auction, but it does suggest some weakness for the longer end of the yield curve.

Front month MBS are mostly done trading for their life cycle (which ends this afternoon) making for trades that are few and far between. Both Treasuries and MBS look as if they're still in the process of figuring out what they're going to do with these auction results. We have seen the expected weakness, but not much.

10's are not even half a bp higher than pre-auction levels at the moment and MBS are still at pre-auction levels. It's an outside possibility that one or two lenders would be spooked enough by the results combined with the slight weakness leading up to them, to be considering a negative reprice, but that's less likely than simply seeing no reprices (at least not due to MBS price movements... Lender reprice behavior is less predictable around monthly settlement time).

Fannie 3.5s are up 5 ticks on the day at 101-02 and 4.0s are up 3 ticks at 104-03.

The FNMA 4.0 just hit 104-09 while the 3.5 hit 101-08. Lenders that issued rate sheets prior to 9am might be in a position to reprice better if gains hold.