Despite Strong 7 Year Note Auction, Light Volume Keeps Lid on MBS


Here’s the latest alert from MBS Live:

7 Year Treasury Auction an Absolute Triumph. Possible Positive Reprices 1:20PM

After 5 auctions in a row (7 out of the last 8 as well) resulted in higher than “when-issued” yields, today’s auction stopped through at a much lower yield (1.415 vs 1.44). There were 3.2 dollars bid for each dollar offered, crushing the recent average of 2.74 and combined with the better than anticipated yield, sending a clear message that US Debt is in high demand (we’d also point out that there wasn’t a higher-than-normal indirect bid, which is a rough proxy for foreign demand). 

10yr notes hesitated for a moment at their previous lows of the day, then moved lower and are currently contending with a break of 1.90. Although this puts 10’s well into the green on the day, MBS are struggling to hold onto a 1 tick gain, currently at 102-01. If MBS hold over 101-30, we could see some reprices for the better this afternoon, but would also expect lenders to be tentative ahead of what is essentially a long weekend.


As noted in the alert, we could have entertained a positive reprice if MBS held over 101-30, but they haven’t–not consistently anyway.  The auction was indeed strong and Treasuries continue to trade well, but the biggest problem plaguing MBS markets at the moment is an utter and complete lack of liquidity.  As you can see in the chart below, things are very choppy, with prices moving 4-5 32nds on a single tick.  The fact that this continues to happen throughout the day is a good sign of illiquidity.  The other good sign is that I’m telling you things are illiquid.  Bid/Ask spreads are really that wide.  Nothing is going on, and no one should read anything into the current state of MBS pricing other than that which has already been mentioned.  Personally, I would probably have set rate sheets for something around a 101-26 price in Fannie 3.5’s this morning and then just taken off for the day, leaving a robot monkey of some sort in charge of sending out a reprice if things crossed 101-16 on the downside, but leaving no instructions for positive reprices on the upside. That said, there may be a robot monkey or two out there was left with conditional instructions for price improvements, but we haven’t heard from them so far…

Once volume picks back up for MBS on Monday (hopefully), we’ll be more able to assess whether or not the recent trends remain intact.  It’s interesting to see that they still hold up to today’s choppy movements (but please note that the chart below has a wider time interval between ticks than the chart above, thus smoothing things out a bit).


The rally in Treasuries breaks the sideways trend channel seen between the grey lines below.  We’ll need to wait all the way until Monday for confirmation of that break due to Friday very likely having insufficient volume to do so.

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