MBS MID-DAY: Making a Comeback

Both MBS and Treasuries have rallied in the past 2 hours as they try to break definitively into Friday's trading range. For 10yr notes, 3.452 is the highest hourly closing yield from Friday and at 3.4536 currently, we're close to marking a similar yield in moments at the close of this hour. The corresponding level for MBS is the important technical level of 101-20. Closing this hour at or near those levels doesn't provide us much of an indication as to the prevailing trend for the day. Volume is low and the ultimate direction is more likely to be based on auction results.

RTRS-U.S. FEB PENDING HOME SALES INDEX +2.1 PCT (CONSENSUS -1.0 PCT) TO 90.8. (NAR) - The Pending Home Sales Index,* a forward-looking indicator, rose 2.1 percent to 90.8, based on contracts signed in February, from 88.9 in January. The index is 8.2 percent below 98.9 recorded in February 2010. The data reflects contracts and not closings, which normally occur with a lag time of one or two months. Lawrence Yun, NAR chief economist, says it’s important to look at the broader trend. “Month-to-month movements can be instructive, but in this uneven recovery it’s important to look at the longer term performance,” he said. “Pending home sales have trended up very nicely since bottoming out last June, even with periodic monthly declines. Contract activity is now 20 percent above the low point immediately following expiration of the home buyer tax credit.” Yun notes there could have been some weather impact in the February data. “All of the regions saw gains except for the Northeast, where unusually bad winter weather may have curtailed some shopping and contract activity. The PHSI in the Northeast fell 10.9 percent to 65.5 in February and is 18.4 percent below a year ago. In the Midwest the index rose 4.0 percent in February to 81.1 but is 15.9 percent below February 2010. Pending home sales in the South increased 2.7 percent to an index of 100.3 but are 5.3 percent below a year ago. In the West the index rose 7.0 percent to 105.6 and is 0.6 percent higher than February 2010. “We may not see notable gains in existing-home sales in the near term, but they’re expected to rise 5 to 10 percent this year with the economic recovery, job creation and excellent affordability conditions providing confidence to buyers who’ve been on the sidelines,” Yun said

(Reuters) - President Barack Obama faces the challenge on Monday of convincing Americans he has clear military aims and a U.S. exit strategy in the Libya conflict as he seeks to counter growing congressional criticism. In a high-stakes televised address, Obama -- accused by many lawmakers of failing to explain the U.S. role in the Western air campaign against Libya's Muammar Gaddafi -- will try to define the mission's purpose and scope. His task was made easier when NATO agreed on Sunday to assume full responsibility for military operations in Libya, ending uncertainty about who would lead the allied effort. Obama is expected to hail the alliance's decision as proof he is making good on his pledge that the United States -- with its forces entangled in Iraq and Afghanistan -- will play only a limited role in a war in a third Muslim country. Rebel gains on the battlefield in Libya could also give him a boost. But Obama still must reassure an American public preoccupied with domestic economic concerns that intervention in Libya serves U.S. national interests and also overcome doubts that he has a clear idea of an end game.

Markets seem to be shrugging off this news: (Reuters) - Highly radioactive water has leaked from a reactor at Japan's crippled nuclear complex, the plant's operator said on Monday, while environmental group Greenpeace said it had detected high levels of radiation outside an exclusion zone. Reflecting growing unease about efforts to control the six-reactor Fukushima Daiichi complex, plant operator Tokyo Electric Power Co (TEPCO) had appealed to French companies for help, the Kyodo news agency said.A partial meltdown of fuel rods inside the reactor vessel was responsible for the high levels of radiation at that reactor although Chief Cabinet Secretary Yukio Edano said the radiation had mainly been contained in the reactor building. TEPCO later said radiation above 1,000 millisieverts per hour was found in water in tunnels used for piping outside the reactor. That is the same as the level discovered on Sunday. The U.S. Environmental Protection Agency says a single dose of 1,000 millisieverts is enough to cause hemorrhaging.

Loan pricing is set to weaken this morning as "rate sheet influential" MBS coupon prices are lower by 6 to 8/32nds. At current indications we'd anticipate rebate to be dinged anywhere from 10-20bps on C30 note rates between 4.75 and 5.25%. Poor housing data was a key theme last week and this week isn't likely to produce a different trend. The Pending Home Sales Index fell 2.6% in January and is expected to dip another 1% in February. This index is a tool for predicting the sales of existing homes, which fell 9.6% in February to an annual rate 4.88 million units. Sales were down in all four regions in February and median prices are down 5.2% compared to this time last year.

8:30 Personal Income and Spending data did little to spark investor activity. Instead a slow sideways grind to the right persists ahead of 10am Pending Home Sales data. Rate watchers should take notice of the flatter yield curve though. Shorter dated debt instruments are the biggest losers so far today with the 2-year note yield up 3.3bps and the 5-year note up 4.2bps. This "Bear Flattening" behavior was witnessed on Friday as well and is a logical expectation as Treasury has scheduled $99 billion in debt auctions in the days ahead. It makes sense that longer-dated Treasuries would be outperforming with auction supply centered in the short-end/belly of the curve. Traders are simply building whatever price concessions they can against the Treasury to cheapen the debt they are about to bid on later today, tomorrow and Wednesday.

(Reuters) - U.S. consumer spending rose slightly more than expected in February for the eighth straight month of gains as households tapped their savings, government data showed on Monday, while inflation accelerated at its fastest pace since June 2009. The Commerce Department said spending rose 0.7 percent after an upwardly revised 0.3 percent gain in January. Economists polled by Reuters had expected spending, which accounts for about 70 percent of U.S. economic activity, to advance 0.6 percent in February after a previously reported 0.2 percent rise. Spending adjusted for inflation increased 0.3 percent last month after being flat the prior month. After increasing at its fastest clip in four years in the final three months of 2010, consumer spending is expected to slow in the first quarter, with rising energy and food prices stealing from spending on other goods and services. Spending grew at a 4.0 percent annual rate in the fourth quarter, helping to lift overall economic growth to a 3.1 percent pace during the quarter from 2.6 percent in the July-September period. High food and energy prices pushed up overall inflation last month. The Commerce Department said the personal consumption expenditures price (PCE) index rose 0.4 percent, the fastest since June 2009, after gaining 0.3 percent in January. The Federal Reserve's preferred measure of consumer inflation -- the core PCE index excluding food and energy -- increased 0.2 percent after rising by the same margin in January. In the 12 months through January, the core PCE index rose 0.9 percent, the fastest rise in four months, after rising 0.8 percent in January.

US FEB PERSONAL INCOME +0.3 PCT (CONS +0.4 PCT) VS JAN +1.2 PCT (PREV +1.0 PCT). US FEB PERSONAL SPENDING +0.7 PCT (CONSENSUS +0.6 PCT) VS JAN +0.3 PCT (PREV +0.2 PCT). (BEA) - Personal income increased $38.1 billion, or 0.3 percent, and disposable personal income (DPI) increased $36.0 billion, or 0.3 percent, in February.Personal consumption expenditures (PCE) increased $69.1 billion, or 0.7 percent. In January, personal income increased $147.4 billion, or 1.2 percent, DPI increased $92.0 billion, or 0.8 percent, and PCE increased $29.5 billion, or 0.3 percent, based on revised estimates. Personal outlays -- PCE, personal interest payments, and personal current transfer payments -- increased $69.8 billion in February, compared with an increase of $30.2 billion in January. PCE increased $69.1 billion, compared with an increase of $29.5 billion. Real disposable income decreased 0.1 percent in February, in contrast to an increase of 0.5 percent in January. Real PCE increased 0.3 percent, in contrast to a decrease of less than 0.1 percent. Private wage and salary disbursements increased $16.4 billion in February, compared with an increase of $16.7 billion in January.

The week begins with the FNCL 4.5 bid below 101-20 support and the 10-year note trading in a bearish trend channel after key support levels were broken on Friday in a low volume environment. 10s continued their upward drift early in the London session after moving mostly sideways in Asian trading. More hawkish Fed rhetoric was on the wires Saturday with St. Louis Fed President James Bullard communicating his nervous sentiments surrounding the FOMC's use of the phrase "Extended Period" to describe its low interest rate policy. Middle East/Northern Africa/Japan headlines did little to motivate the market even as the situation in Japan took a turn for the worse after high levels of radioactive water were said to be leaking from reactors. Barring a drastic downturn in developing events abroad, trading technicals remain the market's main focus though. With bearish momentum gaining traction and Treasury auctions in the week ahead, we see room for rates to run higher (but hope cheaper levels and a lack of new short positions will prevent a significant spike).

More hawkish Fed rhetoric. It's like they are trying to tell us something! The Fed is definitely entering that gray zone where they need to walk a very thin line between inflation and a return to disinflation. (Reuters) - Lengthening the "extended period" of low U.S. interest rates could encourage a liquidity trap, a top Federal Reserve official said on Saturday. St. Louis Federal Reserve President James Bullard was commenting on the Fed's promise to keep interest rates low for an "extended period" to blunt the effect of recession. "The conventional wisdom policy response to a negative shock is to promise a longer 'extended period'," St. Louis Federal Reserve President James Bullard said, according to slides he was due to present in Marseille, France on Saturday. "This may work -- but it may also encourage a liquidity trap outcome," he added in the slides, part of a presentation entitled 'Reducing Deflationary Risk in the U.S."A better policy response to a negative shock is to expand the QE program," he added, referring to the quantitative easing, which he said have been successful in the United States and Britain. Bullard, who is a not a voting member on the Fed's policy setting panel this year, is viewed as a centrist on the spectrum of supporters or opponents of aggressive Fed actions to boost the economy. The global economic recovery is continuing, Bullard said, adding: "During the recovery process, economies are susceptible to further negative shocks."