MBS RECAP: Out at the Lows

Treasury today announced the terms of next week's 2/5/7 year note auctions. In total Treasury will sell $99 billion over a three day period. We'll get $35bn new 2s next Tuesday March 28th, $35 billion new 5s next Wednesday March 29th, and $29 billion new 7s next Thursday March 30th.

Chairman Ben S. Bernanke will hold press briefings four times per year to present the Federal Open Market Committee's current economic projections and to provide additional context for the FOMC's policy decisions. The introduction of regular press briefings is intended to further enhance the clarity and timeliness of the Federal Reserve's monetary policy communication. The Federal Reserve will continue to review its communications practices in the interest of ensuring accountability and increasing public understanding. In 2011, the Chairman's press briefings will be held at 2:15 p.m. following FOMC decisions scheduled on April 27, June 22 and November 2. The briefings will be broadcast live on the Federal Reserve's website. For these meetings, the FOMC statement is expected to be released at around 12:30 p.m., one hour and forty-five minutes earlier than for other FOMC meetings

Here we are at the official bond market close and 10yr yields are pushing over 3.402. This isn't enough of a break above 3.40 to be super significant, but it could still impact us if it drags MBS any weaker. FNCL 4.5's are at their lowest levels of the day and there is a small risk of reprices for the worse from the edgiest lenders. Current prices are at 101-26. So reprices are possible, though not likely to be prevalent. A few ticks lower in MBS, then likelihood would increase significantly.

Pretty simple story playing out today... Treasuries are relatively weaker than MBS, continually pulled higher in yield by strong stocks, but fairly sideways near the 3.39 highs in the 10yr. Whereas the overall trend in treasuries has been one of ever-so-slightly-worse weak points, MBS by contrast have seen their weakest points of the day creep ever-so-slightly higher. 101-26, 101-26+; and 101-27 have been the 3 major lows so far for FNCL 4.5's whereas 10yr yields have seen 3.387, 3.394 and 3.398 at similar intervals. That most recent threat of 3.40 is currently looking like it's bouncing lower and yields are back down to 3.81. FNCL 4.5's are in the upper middle portion of their range today at 101-30.

(Reuters) - The primary regulator for the largest U.S. banks is preparing to move ahead on its own settlement with lenders over foreclosure practices and may announce a deal in the next few weeks, according to a source familiar with the process. The Office of the Comptroller of the Currency's possible split from other U.S. authorities would mark a dramatic shift away from efforts for a coordinated settlement with major mortgage servicers, including Bank of America Corp, Citigroup Inc and Wells Fargo & Co. U.S. authorities -- including bank regulators, the Department of Justice and a coalition of 50 state attorneys general -- are probing allegations that banks foreclosed with improper documents and cut corners on repossessing homes from borrowers. The OCC is in talks with the banks it regulates to prepare so-called consent orders, requiring the banks to fix faulty foreclosure processes within a certain timeframe, and potentially levying fines for violations, the source said. The OCC, according to the source, has become impatient with infighting over the structure and shape of a coordinated settlement.

MBS are fighting back against a gradual uptick in benchmark yields and are doing so in the form of tighter spreads. In other words, treasury yields are getting higher compared to MBS yields. MBS had their best recent bout of tightening since about 10:30am this morning. Over that time, 10yr yields have backed up from 3.36 to 3.39 while MBS have only shed 1 tick from 101-29 to 101-28 currently. That leaves MBS still within their narrow range-trade while treasuries are on the outermost limit of their range (3.39 is the first line of defense, 3.40 would be a more serious break). So while we wouldn't expect reprices for the worse in MBS, we'd remain defensive and cognizant of the fact that benchmarks are telling a different story--one to which MBS may be forced to pay attention if things get any worse.

THIS COMMENTARY ALIGNS WITH MND'S STANDING CALL FOR A "MARGIN SQUEEZE" ON MAIN STREET.......(FANNIE MAE) -The economy continues to show increasing signs of self-sustaining momentum, however an unexpected jump in oil prices and the potential for further tightening of fiscal policy suggest less economic momentum than previously believed, according to the March 2011 Economic Outlook released today by Fannie Mae's Economics & Mortgage Market Analysis Group. Projected economic growth for the year was lowered to 3.5 percent — down slightly from 3.7 percent in February 2011, but up from 2.7 percent annual growth in 2010. The recent jump in oil prices and unpredictability of the magnitude and duration of the oil price rise has injected additional uncertainty about the prospects for consumer spending and economic growth for 2011 and 2012. "The increase in oil prices has an impact on the economy, especially on the consumer side," said Fannie Mae Chief Economist Doug Duncan. "The U.S. consumes roughly seven billion barrels of oil each year, so every dollar increase in the cost of energy translates into a $7 billion annual tax on consumers, reducing their disposable income available for spending on other goods and services." Consumer uncertainty also continues to stifle demand for housing, keeping the housing market on a bumpy road to recovery. "Our National Housing Survey results during the last year have been very clear regarding consumer uncertainty about the economic and housing environment," said Duncan. "This uncertainty, coupled with the rise in oil prices, is precipitating reluctance among people to take on large financial obligations such as borrowing money to purchase a home."

We've never seen the movie Postcards From The Edge, but we can only assume said postcards would be sent by the 10yr Treasury note which is currently on the edge of a recently prevailing bullish trend channel. A movement above 3.39 would be an early indication of a break outside that bullish trend and into a sideways or bearish one. FNCL 4.5's have been able to BARELY hold on to their 3 day range between 101-27 and 102-00 and currently at 101-28 are in the best-traveled part of the range. But with 10yr yields at 3.387, extreme caution is the order of the day as a technical breakout in benchmarks could easily pull MBS lower.

The recent "sideways" market has been driven by two competing trends. These can be seen in the post linked below. Both are trend channels, one bearish, one bullish. Then there's the big picture horizontal considerations presented in the first chart. Plain and Simple: We're still teetering on a directional bias shift. Support hasn't been broken yet, but you should be aware of the above inflection levels. Highly recommended reading!!!!