MBS RECAP: Reversal Of Fortune On Small Scale


The refreshing afternoon swim continues for bond markets, which have been moving one direction in the pool on the deck of cruise ship heading in another direction.

Treasuries have been the star of the show this afternoon as moderate slide lower in yields turned into a mini-snowball of short covering bringing 10’s quickly from 1.90+ to 1.87. There was a moderate amount of volume behind the move, but nothing compared to this morning. Still, it wasn’t the kind of late Friday move we sometimes see where low volumes are exacerbating a move in one direction or another.

Whatever the case, it was enough to catch the attention of accounts who were betting on higher interest rates, forcing them to cover their short positions, which temporarily added to the positivity. Things seem to have leveled off for now at least and 1.868 was as low as 10yr yields made it before heading back up to 1.877.

There’s been a bit of a sideways grind between those highs and lows, but without any meaningful drive to or below the mid 1.86 technical levels, we’re just looking at the best possible short term gains within the longer term “ominous” trend (which is the breaking and revisiting of the 1.865 inflection point only to bounce higher).

If Bernanke or other events prove to be super helpful on Monday, this technical battle still might not be over, but even then, there’s little that bond markets can do in the short term to disprove the longer term, very slightly upwardly sloped trend in rates beginning in the summer of 2012.

Enough of that gloom for now… Just keep it in mind when considering longer term strategies. The more timely news is that lenders are indeed repricing positively. Fannie 3.0’s continue grinding sideways around 104-06 (February coupons) and the longer those levels are maintained, the more lenders may come into the pool for a positively revised rate sheet. That said, the late-day rally looks like it’s already run its course. We’ll let you know if it makes another appreciable move in either direction, especially if there’s a pricing implication.

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