MBS RECAP: 2/7/2012


10yr spiked up just after 1pm and MBS prices fell past their 103-19 pivot in Fannie 3.5’s. Does that mean that the 3yr note auction is exclusively behind that market movement? Yes and no…

In and of themselves, 2 and 3yr auctions aren’t enough to move the whole pile of Treasuries as they ostensibly have today. But given the current backdrop of bond market weakness following last week’s NFP, and the fact that any bounce back versus that weakness was largely due to ongoing uncertainty over the Greek bailout negotiations, there’s a fair amount of inherent bearishness seeking to run its course within the range in bond markets. This was actually likely to be the case even BEFORE NFP, and now the higher probability scenario is simply playing out.

That means that while the 3yr auction wasn’t quite weak enough to justify current losses, it was enough to add on to the pre-existing momentum. News out of Greece is now exacerbating the problem.

At first, it looked like breaking news that today’s meeting was postponed until tomorrow would HELP bond markets. Indeed this was the case at first. But then a second wire crossed that clarified the reason for the postponement was that political leaders had yet to get a draft of the bailout agreement. This apparently was less of a concern to the general “risk-on” sentiment compared to other potential reasons for meeting postponement.

MBS are currently trying to dig their heels in at 103-19 and treat those levels as a floor for the rest of the day, and seem to be capable of such things as long as 10yr yields treat 1.99 as a ceiling, a feat they’ve been trying to demonstrate for the past 15 minutes or so.

Even so, the current level of weakness is very likely enough for a few lenders to be considering reprices for the worse, and just as it was earlier in the day, those risks would increase with prices of Fannie 3.5’s falling below 103-19.

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