MBS RECAP: 1/13/2011

As expected, considerations surrounding auctions have dominated momentum this week. Friday will now take it's turn with the final say. It's unlikely that a horribly bond bearish day tomorrow would push yields through the high end of the recent range, so from a long term perspective, that's a good thing. But on the bullish side, we'd need some sort of confirmation or even endorsement of the recent consolidation in order to break below 3.27 tomorrow. To that end, a big raft of data and Fed speak presents itself with CPI and Retail Sales at 830, Industrial Production at 915am, consumer sentiment at 955am, business inventories at 10am, and fed speak from lacker and rosengren in the afternoon. For full details on Friday's lineup, check out the week ahead post linked below

Before reprices for the better, rebate had improved on average by 24.6bps vs. the repriced (worse) rate sheets we saw yesterday afternoon. After reprices for the better this afternoon, rebate is on average 34.9bps better than it was yesterday afternoon. The largest improvements have been awarded in the note rates at or below 4.875%. We are now seeing some lenders paying enough on 4.75% notes for the expensive buydown costs to be overlooked (no discount points needed).

(Reuters) - The U.S. economy should grow around 3 percent to 4 percent this year, a healthier clip than in 2010, but not enough to bring down unemployment as much as policymakers would like, Federal Reserve Chairman Ben Bernanke said on Thursday. Bernanke added that credit is still tight and banks need to become stronger before they start lending again. Bernanke says Fed policies have contributed to a stronger stock market. Says interest rates are higher because economic expectations are improving. Bernanke thinks deflation risks have receded considerably

More and more reprices for the better are being reported since the FNCL 4.5 MBS coupon ticked back over our 102-16 reprice target. It is safe to say recalls are now widespread.

The "average at best" 30 year bond auction has led to a modest amount of price weakness in the "rate sheet influential" side of the MBS coupon stack. Our reprice target for FNCL 4.5s is still 102-16. If we cross back above that level and maintain positive progress, reprices for the better will be more likely.

Treasury just auctioned $13 billion 30s at a high yield of 4.515%. This was 2.2bps above the 1pm "When Issued" yield. The bid to cover ratio, a measure of auction demand, was about average at 2.67 bids submitted for every 1 accepted by Treasury. Dealers took down a slightly above average 49.9% of the competitive bid. Directs added an above average 12.4% of the issue and indirects took home a 37.8% or $4.9 billion, which is line with recent averages. Because of the 2.2bps tail and forced uptick in dealer participation, we'd be biased to say this auction was "average at best"

The outer limit of our reprice for the better range was 102-16. That level was just hit by FNCL 4.5s and we are indeed seeing a few reprices for the better. We would however expect most lenders to delay recalls at least until the final Treasury auction of the week is completed at 1pm.

Treasury will announce the results of their $13 billion 30 year bond offering at 1pm. The five auction bid to cover ratio average is 2.61. High yields have tailed the 1pm "When Issued" yield by an average of 0.58bp (less than 1bp). Dealers have taken 48.5% of the competitive bid, directs have been awarded 10.9%, and indirects have taken home 40.5%. Currently the "When Issued" yield is bid at 4.485% vs. the OTR 30 yr bond yield of 4.481%. Only three of the last 7 long bond auctions have stopped thru screens.

The 2s/10s curve and 2s/30s curve are both flattening at a rapid pace as investors take profits on steepener positions ahead of the $13 billion 30 year bond auction. This move is essentially profit taking followed by new position adding (flatteners), which helps support our slightly bullish interest rate bias. Compounding the rally was an aggressive Fed POMO in the belly of the curve this morning. The Fed bought $8.412 billion of Treasuries vs. the $20.995 billion that was offered. $3.8 billion of that $8.412 billion was spent on OTR 7s. This is a sweet spot for mortgages. Offers were lifted on these issues.

On average, at the five major lenders, rebate on C30 paper is 24.6bps better vs. reprices seen yesterday afternoon. Though the largest improvements are noted in note rates used to fill 4.0 MBS trades, we did notice 25bp improvements in 4.875 and 4.75% quotes. Lenders who did not reprice for the better yesterday afternoon are about 40bps better today on those offers. Let us know if you are seeing something different.

Source: Reuters

Source: Reuters

Source: Reuters

Source: Reuters

Source: Reuters

Liquidity is thin and price volatility has picked up this morning after yesterday's well-attended 10yr TSY note auction. There are all sorts of factors to consider as to why this is happening but those explanations seem far less important in the "here and now" when compared to how today's 30yr bond auction is received. The thing is, it probably doesn't need to be a super strong auction for the bond market to maintain its slightly bullish bias, which was created by a disappointing Employment Situation Report last Friday. As long as it's not a horribly weak auction that leaves the street bloated with inventory, we don't see the market offering outright suggestions that would be indicative of higher yields in the aftermath. Then again we don't see any major indications that the bond market is ready to make a rapid run toward lower yields either

With a recurring low established at 102-08 in FNCL 4.5's and prices currently at 102-11, set your first reprice alert levels for a significant break below those lows for early reprices, around 102-06, and from there, increasing risk as 102-00 is approached. On the upside, first chances of reprices for the better at "mid-handle" of 102-16 or higher.

We expect to hear more anti-inflation rhetoric after South Korea raised interest rates on Thursday, surprising markets, and unveiled a set of measures to contain mounting inflation as policymakers around the world battle a surge in prices of food and other commodities.

Although morning econ data generally favored lower interest rates, bond traders remain focused on underwriting the final Treasury auction of the week, which holds $13 billion 30 year bonds at 1pm. Trading volumes have been below average today, thus a lack of liquidity is contributing to choppy price action . The long bond is the weakest spot on the curve with a modest 1.4bps jump in yield. Production MBS coupons are outperforming

10yr Tsy Yields Continue To Make Choppy Movements This AM, and with increasing magnitude. Yields abruptly shot up over 2bps in 30 seconds. This could spell risk of reprices for the worse among lenders who already had prices available this morning.

One in every 45 U.S. housing units was the subject of a foreclosure filing in 2010, a year in which a total of 3,825,637 such filings were recorded. Foreclosure filings include default notices, scheduled auctions and bank repossession. In all, 2,871,891 properties were affected by the filings, a new record. The numbers were reported by RealtyTrac on Thursday in its Year-End 2010 U.S. Foreclosure Market Report. The filings represented an increase of 2 percent from 2009 and 23 percent from 2008. FULL STORY: http://www.mortgagenewsdaily.com/01132011_foreclosures_realtytrac.asp

4.5's had been trending downward amidst choppiness in treasuries. After the recent bounce in 10yr yields just over 3.37, MBS showed their appreciation for treasuries holding the range by moving (albeit slightly) to their AM highs. This is merely to illustrate that as the day progresses, MBS will tend to respond positively to stability in benchmarks and NOT to suggest that stability will prevail this AM! (stay vigilant)

FDIC chairman Sheila Bair says would be surprised if major changes made to Dodd-Frank financial reform law. Bair says Dodd-Frank is a good bill, would create uncertainty to make any major changes to it

Immediately following 830am Data, Benchmark 10yr note yields fell to their best levels since Tuesday, just under 3.35, but have thus far been unable to carry that momentum decisively lower in yield with another auction looming at 1pm. If they remain resisted by this technical level, look for support to attempt to develop between 3.37 and 3.39+

US NOV TRADE DEFICIT $38.31 BLN vs. CONSENSUS $40.50 BLN). vs. OCT DEFICIT $38.42 BLN (PREV $38.71 BLN). NOV EXPORTS +0.8 PCT VS OCT +3.0 PCT, IMPORTS +0.6 PCT VS OCT -0.8 PCT

DEC PRODUCER PRICES +1.1% vs. CONSENSUS +0.8%. DEC PPI EX-FOOD & ENERGY +0.2% vs. CONSENSUS +0.2% DEC PPI INTERMEDIATE GOODS +1.0%; CORE +0.4%. PPI CRUDE GOODS +4.0%; PPI ENERGY PRICES +3.7%; PASSENGER CAR PRICES -0.4%; NOV PPI UNREVISED AT +0.8%

US CONTINUED CLAIMS FELL TO 3.879 MLN (CON. 4.095 MLN) JAN 1 WEEK FROM 4.127 MLN PRIOR WEEK (PREV 4.103 MLN) /// US NEW JOBLESS CLAIMS HIGHEST SINCE WK ENDED OCT 30; CONTINUED CLAIMS LOWEST SINCE OCT 25, 2008 (Source: Reuters)

Source: Reuters

(Reuters) - Oil extended gains on Thursday to hold under $92 a barrel, buoyed by signs of higher demand after U.S. crude stockpiles fell more than expected and a cold snap swept through the U.S. Northeast, the region's largest heating oil market. http://www.reuters.com/article/idUSTRE6BD61U20110113

(Reuters) - World stocks climbed to a new 28-month high despite weakness in Europe on Thursday while the euro held on to the previous session's gains as bond auctions in Spain and Italy went without a hitch. The bond auctions followed Wednesday's smooth sale of Portuguese debt and took the edge off concerns about the ability of debt-strapped euro zone issuers to fund themselves. Spain sold 3 billion euros of five-year bonds, raising the maximum amount targeted. The yield was higher than at a previous auction in November but lower than recent secondary market levels. http://www.reuters.com/article/idUSTRE7021N620110113

(Reuters) - The European Central Bank will face a grilling on its assessment of the euro zone debt crisis and firming price pressures in the bloc after it left interest rates on hold at 1 percent on Thursday. The decision was correctly forecast by all economists polled by Reuters and keeps rates at the record low they have been at since May 2009. There was little reaction in markets, with the euro and bund futures little changed. http://www.reuters.com/article/idUSTRE70C2NM20110113