Give this one a D for Dog. Below average bid to cover, low Indirect bid, 1.8 bps tail, and the beat goes on. Fast market conditions exist with the MBS down 9/32’s. Be careful out there.
With the market inundated with headline risk, fixed income traders do not know which way to turn, whether it’s for guidance or to take cover. Part of the problem is the current breadth of the market and the lack of liquidity that goes along with it. Many see the risk/reward as “not worth the trade” and choose to stay away. Others blame the contagious scenario of big spending and debt burdened governments, both across the pond and within Uncle Sam’s balance sheet as additional layered risk. Pile on California, New York, and the state government debt situations of New Jersey just for good measure. What will happen when the MBS purchasing power of the Fed subsides is just icing on the cake.
All of the above are making mortgage pricing swing like a monkey in a tree. In the short run, it’s anyone’s guess where pricing will go. One thing we do know is that the market will stay defensive into tomorrow’s 30 year bond auction. Expect treasuries to continue to be under pressure, continuing to pullback given the lack luster reception to the 3 and 10 year auctions already in the books. Currently, the 10 year note is down 17/32’s trading at 3.70% (took out support at 3.68%). Mortgage backs are down 9 to 12/32’s, holding steady albeit at lower levels. Keep your defense on the field until at least tomorrow afternoon.