Recap of Treasury Auction Jargon if you need it: HERE
Although the bid-to-cover ratio of 3.06 might look average on the surface (indeed it is relatively average, perhaps a little less-than average for 2012, even), there are two important factors to consider being the most obvious: that the high-yield stopped through 1.4bps lower than the 1pm when-issued yield.
First is that yields are simply lower than markets are used to in general. Today’s auction was some 20bps lower than May’s record low auction. It’s a big leap, psychologically and literally. That can create some hesitation, or rather, situations like these have created hesitation in the past.
The second point is in the same vein, and that is that today’s movements so far were already leaning toward the strong side. Granted, we do suspect that we witnessed a bit of a “stealth concession” built into y’day afternoon’s weakness, but nevertheless, that back-up in yields was fairly minor and this morning’s move has been progressively stronger since the open.
Taken in concert, these factors, along with the better-than-expected stopping yield paint a picture of a US Treasury security that has little to fear when it comes to being “overbought” or “too low in rate” in the current environment. And while these things could easily change in the next 7 days, markets are sending a clear message that they are where they want to be heading into the Greek elections this weekend and FOMC next week.
MBS love that “stable benchmark” stuff in general, but MBS traders are smart enough to realize the risks to that stability inherent in the coming days. So while MBS are comfortable following the improvement in Treasuries to some degree, there’s no “huge sigh of relief” with the sense of “Oh, it’s ok to buy more MBS now that 10’s look more stable.” Key takeaway here is that 10’s only look more stable for now.
Fannie 3.5s are up 3 ticks since the auction and 10yr yields are down just over 2bps. It’s a positive result and one that could result in only the earliest and most aggressive few lenders repricing positively. Otherwise, it’s just “nice” for now. Looking for 3.5’s to break north of 104-26 to increase positive reprice chances or south of 104-21 for negative reprice risk to be increasing. That range is a bit more of a moving target in terms of 3.0s, but probably best viewed at 102-02 being downside risk with 102-07 (i.e. breaking and holding outside these levels) being the upper resistance “line in the sand.”