MBS RECAP: Heading Out at Best Levels After Shaking Off Post-Auction Weakness

By: Matthew Graham

Bond markets were at their best levels since Monday heading into today's 1pm 30yr Bond auction (MBS prices don't reflect that only because of the roll).  In so doing, they were rushing to price in a certain amount of positivity (or rather, a fear of being too negative) expected to be validated by the auction results.  They overshot the mark as the auction stats ended up being  slightly weaker than average/  That was still a relatively impressive result given the that bond markets are more prone to weakening ahead of auctions.

In other words, as opposed to betting that the auction would be challenging and breathing a sigh of relief after it was done, traders instead bet on the auction being strong and pulled back a bit after seeing they overshot the mark.

But why take the opposite stance this time around?  It has to do with the big shift in bond markets in February where more bets were made that rates would rise--aka "shorts" or short positions.  When there are a significant amount of shorts in the market and when something comes along like a much weaker than expected Retail Sales report that guarantees a certain amount of bond market positivity, the shorts are forced to cover.  Since a short equates to "bond selling," covering the short means bond buying.  Bond buying in turn raises prices, forcing more shorts to cover.

Shorts further had to protect against the risk that the auction would move against them as well (hence "fear of being too negative"), so trading levels stayed solid right up until we saw the slightly weaker auction results.  That left traders free to redistribute their positions, which eventually left us right about where we were before the short covering rally started.  MBS outperformed Treasuries in that endeavor and ended near the highs of the day.


MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
MBS
FNMA 3.0
101-29 : +0-11
FNMA 3.5
104-26 : +0-11
FNMA 4.0
106-29 : +0-09
Treasuries
2 YR
0.6280 : -0.0440
10 YR
1.9860 : -0.0350
30 YR
2.5770 : -0.0110
Pricing as of 2/12/15 5:02PMEST

Today's Reprice Alerts and Updates
A recap of Alerts and Updates provided to MBS Live subscribers.
2:01PM  :  ALERT ISSUED: Know Thy Lender, and Other Reprice Considerations This Afternoon
9:30AM  :  Bond Markets Weaker Overnight, Stronger after Retail Sales Miss

MBS Live Chat Highlights
A recap of featured comments from the Live Discussion on the MBS Live Dashboard.
Victor Burek  :  "they have to raise rates...said it to much, so going to a .25 they stand by the word but really has no impact"
Hugh W. Page  :  "Risk of deflation in US is very very small. Problem is the Fed has backed itself into a corner now."
Timothy Baron  :  "Going to 0.25 would be a way for the Fed do something and maintain credibility, but not necessarily affect markets adversely. Right? Wrong?"
Steve Chizmadia  :  "I strongly believe this Greece deal and issue will not be resolved on Monday as well. "
Steve Chizmadia  :  "Be interesting to see market reaction if it is broken shortly thereafter"
Matt Hodges  :  "over the weekend you have potential anywhere - Ukraine cease fire to start Sunday, for example"
William Hansen  :  "The next big day to worry is Monday with Greece again?"
Matthew Graham  :  "Germany inviting Greece up on Jens Weidmann's knee for a little heart to heart. RTRS - - ECB'S WEIDMANN SAYS DECISION TO JOIN A CURRENCY UNION COMES WITH RESPONSIBILITIES"
Victor Burek  :  "Santelli gave it d+"
Matthew Graham  :  "absence of concession makes this a stronger auction than the stats would suggest"
Matthew Graham  :  "santelli will grade this worse, most likely, because he doesn't differentiate between refundings and reopenings, and puts too much stock in BTC and not enough in the concession. "
Matthew Graham  :  ""B""
Matthew Graham  :  "RTRS- PRIMARY DEALERS TAKE 35.15 PCT OF U.S. 30-YEAR BONDS SALE, DIRECT 15.45 PCT AND INDIRECT 49.4 PCT"
Matthew Graham  :  "RTRS- U.S. 30-YEAR BOND BID-TO-COVER RATIO 2.26, NON-COMP BIDS $20.17 MLN"
Matthew Graham  :  "RTRS- U.S. SELLS $16 BLN 30-YEAR BONDS AT HIGH YIELD 2.560 PCT, AWARDS 3.44 PCT OF BIDS AT HIGH"
Matthew Graham  :  "30yr Auction "WI" yield at 2.558. Bid-to-cover for refundings (which this is) is lower than reopenings. 2.3-ish vs 2.5-ish. Anything over 2.3 is fine. Indirect bids have been 43-48%, with refundings tending to be lower. (jargon definitions: http://mndne.ws/1gIJmzh)"
Tom Schwab  :  "
REPRICE: Flagstar - Better
"
robert clark  :  "
REPRICE: Provident - Better
"