Both MBS and Treasuries are well off their weakest levels of the morning thanks to technical and tradeflow-based support that came in during and after the Fed’s Twist buying operation from 10:15-11:00am. 10yr yields were technically in an uptrend through 11:00am but broke out of that trend channel right at 11am (though the highest yields were 20 minutes earlier). MBS simply held firm to their 104-16 support level mentioned earlier and have gradually followed Treasuries back into stronger territory.
To some extent the bond market bounce may have amounted to a capitulative risk-off trade following the big bounce lower in equities markets, but we’d hesitate to assume that’s the case just yet. At the very least, the technical/tradeflow picture was supportive as well, with the big bounce lower occurring both sharply, with a noticeable increase in volume, and at the edge of an established technical zone around 1.75.
Since 11am, Boehner’s comments on the Fiscal Cliff situation have helped equities continue to sell-off, though it looks like they’re already trying to bounce. 10yr yields moved moderately lower with stocks and are subsequently moderately in tune with the bounce. 10’s had a chance to break back below the mid 1.71’s technical level and failed in a very clearly delineated fashion, not once, but twice. That’s the line in the sand for broader bond markets at the moment and one that’s not likely to be crossed without the help of a mostly awesome 30yr Bond Auction at 1pm.
As for MBS, negative reprice risk definitely ebbed with prices on Fannie 3.0s making it back up to 104-20 during all this volatility. But much like 10’s, MBS have also encountered resistance at their own inflection point of 104-22. That’ll serve as the MBS-specific line in the sand–to be tested on the chance we see a strong auction or are otherwise able to trade higher in the next hour. For now, it’s overhead resistance.