MBS LUNCH: Official Auction Results

All three of the most watched components are slightly weaker than expected.  Markets had their hopes up for a higher BTC than the 2.62 seen following last go round's steller high 2% numbers.  The 70% range seen in indirect bids last time is also let down a bit by today's 54%.  The 6bp tail (difference between current yield and high yield from the auction) with over 3/4 vote is not horrible, but far from great as well.  All in all, plenty of just cause here for rates to back up a bit today as we wait for the auction that will be much more pertinent to mortgage space tomorrow: the 10yr.

All that said, considering how far we've fallen in yield recently, I think these results are still potentially positive.  Sure, it will cause some short term adjustments and other auctions and data points will finish telling the story.  But the point is that, if these results are the first chapter, the book still may have a happy ending.  Your first piece of evidence to that effect would be the current bounce of the 10yr at 3.5 and the moderate correction in MBS.  At this point, only the MOST skittish lenders might reprice for the worse.  Bottom line: this is a wash and we're still focused on tomorrow's 10yr auction in addition to the ramping up of the week's data points.