MBS Live Morning: Stronger Start, But Why Did MBS Look Lower?

Today's MBS charts initially made it seem like prices had fallen versus yesterday's latest levels.  In a way, they did, but the right side of the chart pertains to MBS that will begin paying investors back one month later than the MBS referenced on the left side of the chart. 

It's that difference in the time value of money that accounts for the difference in prices.  In fact, the time value of money would suggest a slightly bigger loss.  In other words, MBS are are actually in positive territory.  Why today?  The roll.

There are always several months' worth of MBS trading at any given time.  When the "front month" (closest to delivery) is retired/delivered, the +1 month (or "back month") takes over as the new front month.  The apparent drop in prices on roll day is simple the changing of that guard.  If we had both of them on the chart together, here's how it would look:

For all practical purposes, this is a perfect match in terms of day-over-day and moment-to-moment change.  As such, back month pricing is irrelevant to the originator following MBS for cues about rate momentum and intraday risk.  

Today's key risk event will be the 1pm ET 10yr Treasury auction.  That said, with the state of gains so far this morning, the only real risk appears to be a return back toward unchanged levels.  At the moment, we're in the midst of another short-covering snowball.