MBS RECAP: Slight Volatility Around Auction, But Momentum Persists


To refer to the 10yr auction that just happened as “weak” is perhaps overdoing it. If we simply look at the auction statistics vs those of other auctions, it was on the weak side. Bid-to-cover at 2.83 was noticeably lower than the average for 10yr Re-Openings and the stopping yield was about 1bp higher than expected (based on the 1pm “when-issued” yield). But if the auction is viewed in the context of the day’s trading direction, we see a fairly healthy rally in the hour leading up to the auction.

In other words, there was a good amount of last-minute horse-trading between noon and 1pm. There was a growing amount of buzz for a strong auction and markets began betting on that eventuality, building a mini-snowball that carried yields 3bps lower in that hour. Had the auction gone off prior to said snowball, we’d be looking at much stronger results.

That’s why we saw the initial pullback in yields and MBS prices (the fact that the auction didn’t quite live up to the last-minute horse-trading), and the aforementioned “context” is why yields have found what looks to be a firm ceiling before breaking back above the pre-rally highs. Markets are essentially seeking out the levels that likely would have prevailed in the absence of the rally.

Post rally, that = selling pressure, but in context , just a continuation of the same old trend of sideways-to-slightly-better levels that began after Friday’s NFP sell-off. Just another brick, and not a lot of suggestion as to the rest of today’s trading. Bottom line, MBS are hanging tough, still at or near unchanged levels, currently up 2 ticks at 104-14 after being as low as 104-11 after the auction.

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