Fannie 3.5’s were already demonstrating a good ability to hold their ground at 101-26 support, a level they’ve maintained with one brief exception since yesterday at noon. The 5 year Treasury auction just now makes that support even more likely to persist.
The high yield came in 1.6 bps lower than expected as determined by 1:01:30pm when-issued yields (“when-issued” or “WI” = the best proxy for an “estimate” of where the auction will stop). That’s positive in and of itself, but the bid-to-cover ratio was about as high as it gets on 5yr auctions, measuring 3.15 versus a recent average of 2.82.
During almost any other time in economic history, an auction like this would give a much bigger boost to Treasury prices across the curve as well as production MBS, but given the current macroeconomic fears surround the EU debt situation, it’s a well-known fact that US Debt is in high demand–Supercommittee failures be damned. So in a way, the strong result is expected, and thus keeps a lid on most of the positivity that we’d otherwise be experiencing.
That said, MBS are about 4 ticks higher since before the auction, and 10yr yields have edge back down just inside their previous range. This COULD be good enough movement that a lender or two would reprice for the better, but we’d imagine they’d probably like to see these gains hold for a little longer than 10 minutes before doing so.