MBS RECAP: An "Inside Day" At All-Time Highs!


Even among market participants, we don’t see a clear consensus on how to interpret today’s auction apart from the obvious 0.5bps “stop-through” (meaning the awarded yield of the auction was slightly lower than markets had been expecting). Beyond that, we’ve seen and heard a lot of differing takes on how today’s 2.90 bid-to-cover fares vs history as well as the % of the auction totals accounted for by the various account types.

This leads us to reiterate that which has already been said. Refundings and reopenings are distinctly different. a 2.90 bid-to-cover isn’t a big miss when considered vs recent refundings (which is what we had today). Additionally, the % of the total taken down by the dealer community is HIGHER than recent averages for refundings despite being lower than the recent reopenings.

That relatively high % taken by dealers helps account for some of the immediate (but very minimal) knee-jerk higher in yield following the auction. The street got more than it wanted, so 10’s were on sale for the first few minutes after the auction (on sale = lower prices/higher yields).

With that having been worked through, we see 10’s back into the 1.83’s, but still susceptible to motivations from the ‘risk-o-sphere’– that is to say, the general “risk on” vs “risk off” mentality that looks to be mostly governed by Euro-drama at the moment.

To that end, we just got a wire confirming that the EFSF is cutting Greece a scheduled check for €5.2 bln despite recent elections creating the possibility that Greece could vote itself out of the austerity measures required to receive said funds (read that one twice if you have to… It wasn’t fun to write either).

The net effect of this news is bond-market-negative. We’re seeing 1.83’s become 1.84’s as we type and MBS moved down 2 ticks on the day to 104-03 before quickly bouncing back 1 tick into the green at 104-05. Too soon to know if the selling trend will continue through the end of the day, but things are looking weaker at the moment. Bond markets’ fate seems at least loosely linked to equities and the broader concept of “risk.”

Negative reprices are not out of the question among a very small group of “early crowd lenders” but we’d continue to look more for 104-03 and falling before jumping on that band-wagon with both feet.

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