MBS MID-DAY: 1/25/2011

Although traders were quick to book a profit and sell short the 10 year note after a much stronger than expected read on Consumer Confidence, the mid-range pivot at 3.40% is providing support in benchmarks. Unfortunately the 5bp turn around has pressured production MBS coupon prices lower and reprices have been reported.

At 101-30, FNCL 4.5's are at their lowest level since Friday, making reprices for the worse highly likely from lenders who released rates before the Consumer Confidence Report. 10yr yields are at 3.4144, superseding most of yesterday's highs.

US JANUARY CONSUMER CONFIDENCE INDEX 60.6 VS DEC REVISED 53.3 (PREVIOUS 52.5) - CONFERENCE BOARD // US CONSUMER CONFIDENCE INDEX MEDIAN FORECAST FROM REUTERS FOR JANUARY WAS 54.3 // US CONSUMER PRESENT SITUATION INDEX IN JAN WAS 31.0 VS DEC REVISED 24.9 (PREVIOUS 23.5) // US CONSUMER EXPECTATIONS INDEX 80.3 IN JAN VS DEC REVISED 72.3 (PREVIOUS 73.6) - CONFERENCE BOARD // US JOBS HARD-TO-GET INDEX 43.4 IN JAN VS DEC REVISED 46.0 (PREVIOUS 46.8) - CONFERENCE BOARD // JANUARY CONSUMER CONFIDENCE AND EXPECTATIONS INDEXES BOTH AT HIGHEST SINCE MAY 2010 // JANUARY CONSUMER INFLATION RATE EXPECTATIONS HIGHEST SINCE MATCHING 5.5 PCT IN JULY 2009 // JANUARY CONSUMER CONFIDENCE PRESENT SITUATION INDEX AT HIGHEST SINCE NOVEMBER 2008

As expected, when 3.38 failed to hold up as support in benchmark 10yr treasuries, MBS were finally motivated outside their tight morning range and have since fallen 4 ticks to 102-01. While a 4 tick move, in and of itself, isn't usually enough for reprices, lenders who priced early may be perceiving bearish momentum in bonds and thus may reprice for the worse. There is not an extremely high risk of this being widespread unless 10am Consumer Confidence reactions cause the bond market to continue selling.

The notion of "meeting resistance" as stated above has, thus far, been a phenomenon that's relevant to treasuries but not as much to MBS. In 10yr note yields, a bounce at 3.35 is quite clear. 3.38 would be the obvious pivot point from yesterday's low yields, and holding that as support would be a bullish sign. 10's are currently at 3.3713. MBS on the other hand, are sideways, with the FNCL 4.5 at 102-05, a price from which it has not deviated more than a tick in either direction so far this morning. Be aware however, that if 10's break 3.38, MBS could finally start to show some life.

US NOV HOME PRICES IN 20 METRO AREAS -0.5 PCT SEASONALLY ADJ (CONSENSUS -0.8) VS -1.0 PCT OCT - S&P/CASE-SHILLER /// US NOV 20-METRO AREA HOME PRICES -1.0 PCT (CONSENSUS -0.9) VS -1.3 PCT IN OCT-S&P/CASE-SHILLER /// US NOVEMBER 20-METRO AREA HOME PRICES -1.6 PCT (CONSENSUS -1.4 PCT) FROM YEAR AGO -- CASE-SHILLER /// US HOME PRICES IN 10 METRO AREAS -0.8 PCT IN NOVEMBER VS -1.2 PCT IN OCT - S&P/CASE-SHILLER /// US NOVEMBER HOME PRICES IN 10 METROPOLITAN AREAS -0.4 PCT FROM YEAR AGO - S&P/CASE-SHILLER

Short covering and flight-to-quality bids picked up overnight on the UK contraction news. That momentum has trickled over into our domestic session as well. FNCL 4.5's are currently up 5 ticks on the day at 102-07, and 10yr benchmarks are down 4.44bps at 3.3596. First major data hits at 10am with Case Shiller and Consumer Confidence.

LONDON, Jan 25 (Reuters) - Britain's economy unexpectedly shrank in the last three months of 2010, causing a major headache for the government as it embarks on the deepest spending cuts in a generation. Finance minister George Osborne said the shock 0.5 percent contraction would not derail his austerity plans, blaming the drop in output on the harshest December weather on record. But even without the heavy snow, the economy would have struggled to register any growth, according to the Office for National Statistics, an assessment that spooked financial markets, sending the pound tumbling against the dollar

From the IMF..."As emphasized in the conclusions of the recent Financial Sector Assessment Program, an overhaul is needed of the U.S. housing finance system, including the role of the mortgage-related, government-sponsored enterprises. These could be either privatized or converted to public utilities with an explicit (and explicitly funded) guarantee. The authorities should not delay efforts to create an action plan for the future."