Like yesterday, MBS approach today’s Treasury auction having traded in a range “inside” yesterday’s range. We make an exception for the earlier run up above 102-10 not only because of it’s brevity, but also the prevalence of the 102-06 ceiling yesterday and today.
10yr yields have been doing well by comparison, essentially trading a pivot off yesterday’s lowest yields in the 1.99’s. Although the world is largely focused on the Italy-inspired risk-off trade, an auction that deviates from averages by a wide enough margin could push yields back over 2.0, or lead to a break of 1.95 resistance (but the latter feels like it relies more on “panic” as might be manifested by stock/euro weakness). At any rate, here’s the run-down of recent 10yr auctions:
– 6 out of the last 10 have stopped at lower than expected yields
-bid-to-cover has been mostly over 3%, averaging 3.06 for the last 4 refundings
– indirect bidders have averaged about 44%.
It’s a slight concern any time rates are rallying into an auction and with 9/13/11’s stopping out at 2.000%, today’s will be vying for the lowest high yield in modern history. Instinctively, that seems like a challenge, but we been surprised in the past by the degree to which markets have traded in the opposite direction of such fears. We’ll know in about 15 minutes either way.