MBS MID-DAY: 1/12/2011

As stocks have crept into their highest levels of the morning, bonds are at their weakest levels with the 10yr now above 3.41 and FNCL 4.5's at 101-31 and seemingly under pressure. Things may get worse before they get better if the market decides it needs additional concessions before the 1pm 10yr Auction.

It remains to be see whether or not stocks and bond yields will move with much correlation this AM, but at least as far as opening stock levels are concerned, bonds are continuing to hold steady with 10yr notes in a narrow range centered on 3.40. and FNCL 4.5's still at or near 102-00 depending on the moment (+ or - a tick).

The 10yr has taken an opportunity to back up a bit this morning and has done so to a rather logical pivot point around 3.41. This were the high yields from late Dec and 1/3, and the low yields from the 5th and 6th. So far it seems to be holding supportively this AM, but be wary that a breakout could be a negative momentum signal. MBS are just over 102 and any losses that put them near 101-26 (January lows) would coincide with acceleration in reprice risk. On the upside, 102-10 is the next important technical, with a sustained move there, or significant break above likely resulting in reprice for the better potential.

Geithner Comments on China: Beijing's currency regime "not a tenable policy" for world. US needs progress from China on currency, intellectual property issues. China a source of opportunity and concern for U.S. China and U.S.. need each other for economic growth. However, U.S. growth will depend on u.s. decision, not china's policies. U.S. needs "more simple and more fair" tax system

Mortgage purchase applications fell 3.7% in the first week of the New Year, but overall loan application volume nonetheless increased thanks to an advance of refinancings, according to the latest weekly MBA Mortgage Applications Index. The average interest rate for a 30-year fixed-rate mortgage fell four basis points to 4.78%, spurring homeowners to lock in at better rates. Refinances increased 4.9% in the week, helping the overall index climb 2.2%. The four-week average of the index remains down 5.3%. “In a discouraging sign for the home sales outlook, the nascent recovery in purchase applications has recently stalled,” said economists at Nomura Global Economics prior to the release. “Unless the improving trend from late November returns, we may need to lower some of our home sales forecasts.”

Source: Reuters

Economists at BMO Capital Markets note that Portugal’s bond auction yesterday was “somewhat better than expected, with borrowing costs easing and demand at the high end of an expected range.” However, they expressed reservations about the rest of the week. “This removes some pressure on the country to seek a bailout, but investors remain worried that borrowing costs remain unsustainably high and that Portugal will need to seek aid. As well, the bigger test of investor confidence could be Spain and Italy’s debt auctions tomorrow.”

Source: Reuters

Source: Reuters

Source: Reuters

Source: Reuters