MBS RECAP: Weaker To Start And Sideways All Day


Something just over 1.54 had been providing fairly stalwart resistance to 10yr yields moving lower this morning–several bounces, but no dice until the last few moments.

10’s broke down into the 1.53’s and have maintained those levels so far. More importantly, there were frequent “bumps against the ceiling” right after the breakout, which is characteristic of a pivot-point breakout and helps establish the technical significance. In other words, it’s like the 10yr yields are telling us “Yes, that was a good level to watch, and it’s important to us too.”

MBS’s script is a bit different:
“Dear MBS watchers, while we can appreciate the technical breakout in 10yr yields, and indeed are willing to trade slightly higher in price, we’re not overly eager to follow said breakout in lock-step as we seem to be on the receiving end of another dose of new origination supply whenever MBS originators see opportunities to hedge. This has been a problem for us both today and yesterday. We hope you understand and look forward to outperforming again if Treasuries flatten out or move higher in yield. If they move too high in yield, we apologize in advance for Fannie Mae 3.0 30yr coupons, which may not be up to such a task. Sincerely, Fannie 3.5’s”

(FYI, in the time it took to concoct that literary masterpiece, 10’s are back up to the low 1.54’s to test the pivot point yet again–so far holding. But the moral of the story is that we haven’t yet seen a clearcut shift in momentum. MBS haven’t really batted an eyelash, likely for the reasons alluded to above (i.e. falling TSY yields = wider spreads = opportunity to sell/hedge)).

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