MBS RECAP: Widespread Positive Reprices as Speculators Get Flushed

By: Matthew Graham

Given the pace and scope of recent bond market weakness, there are more than a few traders that have open bets on rates moving higher--aka "shorts."  This isn't always as simple as a bet on rates in general, but can also come in the form of bets as to the shape of the yield curve.  In other words, will 10yr yields get closer or farther away from 2yr yields?  Will 30's get closer or farther from 5's, and so on... 

At a certain point, these bets will be covered if the market moves far enough in the other direction.  In other words, if I'm betting on higher rates (aka "selling short") and rates fall a certain amount from their most recent high, I will cover (aka "short-covering") my position by buying.

That's exactly what happened in German Bunds during the overnight session.  It happened all across Europe, for that matter.  Even Greek debt rallied (so once again, you know it's not about the Greek negotiation failure headlines).  The German Bund rally was twice as strong as the move in Treasuries through the morning hours. 

Domestic traders were waiting for the auction to cover.  Some couldn't wait, and that was evident in the rally leading up to the auction.  Afterward, however, it was game on, and we were treated to the biggest rally of the entire April/May/June selling spree.  For perspective, it happened on a day where Treasury yields hit their highest levels in more than 8 months (10yr at 2.50 overnight).  Point being: it was a great day, but it's not a trend yet.  So far, all we know is that a big chunk of speculators betting on higher rates (or wider gaps between 10yr yields and shorter term Treasury yields) got flushed out today.  There was no other organic motivation for the move.


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
99-13 : +0-27
FNMA 3.5
102-30 : +0-23
FNMA 4.0
105-27 : +0-16
Treasuries
2 YR
0.7170 : -0.0120
10 YR
2.3810 : -0.1050
30 YR
3.0960 : -0.1200
Pricing as of 6/11/15 5:23PMEST

Today's Reprice Alerts and Updates
A recap of Alerts and Updates provided to MBS Live subscribers.
1:28PM  :  Nice Post-Auction Rally; Positive Reprices Inbound
9:30AM  :  Morning Rally in Spite of Stronger Data, Thanks to Europe

MBS Live Chat Highlights
A recap of featured comments from the Live Discussion on the MBS Live Dashboard.
Michael Baker  :  "Analysis of Borrower’s Personal Income – Clarified that a lender is not required to prepare a written evaluation of self-employment income when the borrower is qualified using only salaried income and self- employment is a separate and secondary source of income (or loss). Selling Guide Announcement SEL-2014-16 "
Matthew Graham  :  "A+"
Matthew Graham  :  "RTRS- U.S. 29-YEAR 11-MONTH BOND BID-TO-COVER RATIO 2.54, NON-COMP BIDS $9.93 MLN"
Victor Burek  :  "so far so good"
Matthew Graham  :  "RTRS- U.S. SELLS $13 BLN 29-YEAR 11-MONTH BONDS AT HIGH YIELD 3.138 PCT, AWARDS 18.97 PCT OF BIDS AT HIGH"
Matthew Graham  :  "30yr auction preview: The last 5 of these have come in ABOVE their 1pm yield expectation (based on "when-issued" trading levels or "WI"). WI is currently at 3.147 and has risen in the past few minutes. The average bid-to-cover has been 2.36, but the last 2 re-openings were 2.18. If any of the preceding is confusing, check out this primer: http://mndne.ws/1gIJmzh"
Steve Chizmadia  :  "All good by me though, hopefully this is the start of the tide turning and I can renegotiate down the road. "
Joseph Daquino  :  "Been locking at application for months now. So far it has worked out very well so I am going to continue that trend."