MBS MID-DAY: Today's big winner (relatively): Fannie and Freddie MBS!

Once again, bond markets find themselves in weaker territory simply due to the corrective forces that follow strong rallies, and once again, resiliently so.  10yr yields have been losing ground at a very gentle pace during the domestic session, though they were already moderately weaker at the open.

While that overnight weakness also translated to lower opening levels for MBS, Fannie and Freddie 30yr coupons have actually been GAINING ground on average since then (as opposed to Treasuries losing ground).  Additionally, Fannie 3.0s are only down 6 ticks on the day compared to 14 ticks in the price of 10yr Notes. 

What's up with that?  Nothing too complicated, really.  First of all, it's normal for MBS to gain less ground on the way down and lose less on the way up.  Also, in addition to the broad correction, there's also a correction in the 'curve bias.'  That refers to the flattening or steepening trend in the yield curve, regardless of overall strength or weakness.  In other words, if there's a flattening trend, 2yr and 10yr yields are getting closer together, whether their actual yields are moving higher or lower.

Part of the recent rally had been an aggressive flattening trend.  In other words, longer term yields were falling while shorter term yields were holding steady or rising.  As the big move sees this correction, shorter term yields are holding steadier while longer term yields are rising.  For instance, 2yr yields are unchanged at the moment while 10yr yields are 5.4bps higher.  This is a slight benefit for MBS as well because the average life span of the MBS coupons that most directly relate to rate sheets isn't quite as high as benchmark 10yr yields.