MBS RECAP: Losses Recovered. Reprices Reported

Benchmark interest rates moved higher in the overnight trading session as stocks rallied around the world. That didn't last long though. Bonds reversed course following a rush of data and news at 10am. Although the directional move was initially met with resistance, forced buying in the form of short covering in the futures market helped seal the deal on a late day recovery interest rate rally which sent production MBS coupons into the close near their best levels of the session. Reprices for the better were reported but loan pricing was basically flat when rate sheets were re-issued. MBS trading volume was below average as was trading volume in cash Treasuries, but high volume was observed in the interest rate futures market. This indicates day traders played a significant role in today's price action.

If bonds were to improve further from last check, it would be up to further stock losses indicating an accelerating flight-to-safety. That's what we're getting at the moment with the S&P now down to 1308, almost 20 pts on the day. FNCL 4.5's are at their highs of the day at 101-29 and reprices for the better have been rolling in. 10yr notes, met their next technical stopping point in the 3.41's, in line with the bulk of yesterday's low range.

NOTE: The 101-28 reprice target has been reached and reprices for the better are likely from more than just the normally "early crowd." It looks like we're meeting a bit of resistance at current levels, but if stocks fall further, we could see treasury yields move down to yesterday's technical floor. This would likely result in a few extra ticks for MBS gains.

CNBC reports that government sources say federal regulators have a deal on the parameters of a "qualified residential mortgage." Chief among them is that the loan was originated with a down payment of 20%. This is part of the Dodd-Frank bill that would require banks to hold 5% of non-qualified mortgages on their books when selling and securitizing loans (see link on Risk Retention below). Qualified residential mortgages would be exempt from this requirement. In addition, 10% of the down payment must be the borrowers own money. No information yet on whether or not QRM rules will apply to fannie or freddie.

With a fairly connected stock lever so far today, bonds might face an increased challenge as stocks show signs of bottoming out for the day. The S&P fell to 1314 but has since rebounded to 1317.12, surpassing the high mark it experienced just after the noon hour at 1317.09. Thos prices are so close that there may be little technical significance, but the point is that if stocks hold current levels or manage to rebound higher, the stock lever has been connected enough today that we'd be looking at some tough resistance in the high 3.43's. FNCL 4.5's have a nice intraday pivot point to play with at 101-22. If they break much lower than that, it could foreshadow a reprice for the worse. And if we're able to reach 101-28, that's the central target for reprices for the better.

RTRS-U.S. TREASURY SECRETARY TIM GEITHNER SAYS FANNIE FREDDIE OPTION WITH EXPLICIT GUARANTEE HAS "A LOT OF MERIT"

The S&P just printed a new intraday low and benchmark interest rates are benefiting from it. Unfortunately we have yet to hear a convincing enough argument that would warrant a short-term move through strong 10-yr TSY note resistance at 3.42%. The FNCL 4.5 is still in negative price change territory but is just below the intraday high price of 101-25. If the FNCL 4.5 touches 101-28 lenders will be more willing to reprice for the better.

RTRS-BERNANKE - WHEN FED STOPS BUYING LONGER-TERM TREASURIES, PAST EXPERIENCE SUGGESTS MARKETS WILL TAKE IT IN STRIDE

RTRS-BERNANKE - BORROWING TERMS FOR HOME LOANS CURRENTLY TIGHT AND LIKELY WILL REMAIN SOMEWHAT TIGHT GOING FORWARD, PRESENTS SOME HEADWINDS FOR RECOVERY OF HOUSING MARKETS

When answering questions from Sen.David Vitter, Fed Chairman Ben Bernanke expressed a high level of concern over politicians using the debt ceiling debate as a vehicle to address the broader budget deficit. Bernanke is clearly worried about politicians who are looking to grind a rhetorical axe about our commitment to reducing the budget deficit. Bernanke says this strategy would have negative consequences on U.S. interest rates. We've discussed the topic of bond vigilantes in the past and view the debt ceiling debate as a potential catalyst for higher benchmark interest rates. Read More...

RTRS-US REP BARNEY FRANK SAYS URGENCY FOR FANNIE, FREDDIE CHANGES SEEMS TO HAVE EBBED A BIT. RTRS-U.S. TREASURY'S GEITHNER SAYS TAXPAYER LOSSES FROM FANNIE, FREDDIE, WILL ONLY BE FROM LOANS MADE BEFORE CONSERVATORSHIP. RTRS-U.S. TREASURY'S GEITHNER SAYS UNDER ANY GSE REFORM OPTION THE COST OF A MORTGAGE WILL BE HIGHER RTRS-GEITHNER SAYS COST OF MORTGAGES TO BE "MODESTLY HIGHER" UNDER FANNIE, FREDDIE REFORMS. RTRS-GEITHNER SAYS COST OF MORTGAGES TO BE HIGHER UNDER FIRST OPTION THAN SECOND, THIRD OPTIONS.... WASHINGTON, March 1 (Reuters) - U.S. Treasury Secretary Timothy Geithner said on Tuesday that future mortgage costs likely will be "modestly higher" after reforms are completed to the national housing finance system. Testifying before the House Financial Services Committee, Geithner said it will take some years to complete an overhaul of the system and to wind down Fannie Mae and Freddie Mac but said it was important for lawmakers to begin the effort. Geithner said housing markets were "still in a very difficult state" and cautioned that the administration and lawmakers must be careful not to jeopardize a broader economic recovery while dealing with housing finance reform. (Reporting by Glenn Somerville, Editing by W Simon )