MBS LUNCH: Official Auction Results and Analysis
Bid To Cover at 3.28 is absolutely huge. Indirect at 43.9 is healthy to say the least. Furthermore, these numbers may mean all that much more considering the last 10 yr auction saw yields nearing the 4% range.
The net result for both treasuries and MBS is a huge positive. BE AWARE, that treasuries will get the spotlight today, and potentially even through the end of the week. You might find yourself asking: "where are all the MBS gains considering how much tsy's are rallying?" I'll speak to that more in the close, but here's the bottom line, it doesn't really matter if we gain 10 ticks today or 30, we'll still be gaining. At this early stage it looks like the 10yr is pausing right around the 3.34 level which is 29-30 ticks up on the day. Considering that MBS will lag tsy's at the moment, this should be good for longer duration MBS gaining somewhere between half and 3/4's as much. So faces may not get as melted as the initial data suggested. But then again they might. Huge swings back and forth are the name of the game following these auctions.
The only other dark cloud on the horizon--the only aspect of current situation that prevents us from being utterly optimistic--is that stocks have failed to sell off in capitulation to the outstanding fixed income demand. In a weird sort of "chicken or the egg" dynamic, stocks need to fall more to allow tsy yields to fall more even though falling tsy yields (courtesy of this auction) are a catalyst for stock selling. Unfortunately stocks did not sell in response... So we may be waiting for that eventuality before McLovin' gets to the party. The level that has me the most interested at the moment is somewhere right around 877-878 in the S and P. If the index fails to rally through this point, things look good for more selling this afternoon. If the index breaks and holds over that point for a bit, the results for bonds--though not enough for us to see any red--would be desultory nonetheless.
A title bout is yet to be held, but there is a clear fan favorite for new MBS current coupon. Even though it's not official until it's official, here are the charts of all the drama with the 4.5 coupon as opposed to the 5.0.
2s vs. 10s: 241bps (Major FLATTENER!)