MBS RECAP: Over Before It Began


While the short end of the yield curve continues to be pinned down, the longer end continues flapping in the wind (generally in an unfriendly direction). The 10yr Auction has merely added fuel to this fire–not much, but enough to nudge yields to their highest levels of the day and push MBS in line with their lows.

In and of itself, the auction could have been worse. The 2.85 bid-to-cover ratio was in line with broader averages, but on the weak side for a “reopening.” The auction’s stopping yield was also weaker than markets were expecting. Rather than going by any sort of forecast, the expectations for the auction’s stopping yield are clearly broadcast by the “when-issued” market. This auction’s yield was 0.7 bps higher than the 1pm when-issued yield, one of only 3 out of the last 10 auctions to stop at a higher yield.

There was an obligatory push in volume, but it didn’t rival the stir created by the German court news overnight. That was the bigger push toward weakness with this lousy auction simply not getting in the way. We’re essentially leading-off in as defensive a position as possible ahead of tomorrow’s FOMC festivities.

That said, it’s not runaway, “panicky,” weakness… More like “just as much weakness as markets can fit in without it seeming overdone.” MBS are doing a good job of holding their ground into Treasury selling, as expected. The negative reprice risk outlook is a bit uncertain, but certainly, we’d note that actual price levels are no worse than rate-sheet time. Still, we can’t help but feel a bit guarded when prices move lower following a 10yr Auction.

Bottom line, vigilance is increased, but at Fannie 3.0s continue to hold their ground at 103-06 or better, we’d probably not be hitting the panic lock button just yet. The other side of this coin is that we’re not sure why we’d wait to lock unless we were planning on floating into FOMC tomorrow.

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