MBS RECAP: Reprices for Better Reported

*** SENIOR U.S. TREASURY OFFICIAL SAYS GLOBAL GROWTH REMAINS ON TRACK, U.S. RECOVERY HAS GATHERED STRENGTH *** OFFICIAL SAYS KEY CHALLENGE FOR G20 IS TO PERMIT EXCHANGE RATES TO PERFORM FUNCTIONS IN CORRECTING ECONOMIC IMBALANCES *** OFFICIAL SAYS TIGHTLY CONTROLLED CURRENCIES OF SOME EMERGING COUNTRIES CREATE INSTABILITY, PRESSURE THOSE WITH FLEXIBLE FOREX *** OFFICIAL SEES BROAD CONSENSUS AMONG MAJOR ECONOMIES--NOT JUST G7--ON NEED TO LET CURRENCIES TO ADJUST TO MARKET FORCES *** OFFICIAL-INCONCEIVABLE THAT CONGRESS WOULD "PLAY BRINKSMANSHIP" WITH U.S. CREDIT, CONFIDENT CONGRESS WILL RAISE DEBT LIMIT *** OFFICIAL-EXPECTS G7 TO HOLD LONGSTANDING POSITION THAT EXCESSIVE VOLATILITY IN CURRENCY MARKETS IS UNACCEPTABLE *** U.S. TREASURY OFFICIAL SAYS EXPECTS G20 TO MAKE PROGRESS ON DEVELOPING GUIDELINES TO IDENTIFY CAUSES OF GLOBAL IMBALANCES *** U.S. TREASURY OFFICIAL SAYS EXPECTS A LIST OF COUNTRIES WITH IMBALANCES TO EMERGE SHORTLY, WILL GET MORE ANALYSIS *** U.S. TREASURY OFFICIAL SAYS WANT INDICATIVE GUIDELINES TO HIGHLIGHT IMBALANCES THAT HAVE GLOBAL SYSTEMIC IMPACT

Stocks turned back from their rally at around 2:30pm and while there's enough time between now and their close for them to head higher again, for now, the net effect has been positive for bonds. The turn around came at a great time for 10yr notes as they were mere moments away from ticking past 3.505 which had been their upper limits supportive yield from earlier in the day. That bounce combined with a few others to form a pretty solid technical picture in which 10's seem to have established some reasonably firm intraday support. (remember, firm support is never a prediction that it will continue to hold, but rather a line of demarcation between trends. If it breaks, it suggests a shift in trend to something less bullish than that which has kept bonds so healthy today). FNCL 4.5's found their own supportive ledge just over 101-10+. The stability afforded a few more lenders opportunities to reprice for the better.

It's important to note that current MBS price levels do not yet justify a reprice for the worse or remove the possibility of reprices for the better. However, given the relatively high correlation between stocks and TSY's, a similar correlation between TSY's and MBS, and the fact that stocks are rallying significantly, this is an early warning that the rest of day cannot safely be assumed to be in constant rally mode. On a positive note, 10yr notes are holding support still, right at 3.50, having just bounced down to 3.494. FNCL 4.5's are much closer to their HIGHS, currently at 101-12, STILL WITHIN the "safe zone" for reprices for the better. S&P's are up to 1316+ and we doubt TSY's would endure a run up to 1319 without breaking 3.50 support, potentially taking MBS out of positive reprice territory. Any further stock rally and bond selling from there could even introduce negative reprice risk by the end of the day.

CHICAGO, April 12 (Reuters) - Directors of Federal Reserve banks in Kansas City and Dallas unsuccessfully sought another 0.25-percent increase in the rate charged to banks for emergency loans, minutes of Fed meetings in February and March showed on Tuesday. The other 10 regional Fed banks wanted no change in the discount rate. The U.S. central bank's board sided with them, keeping the discount rate unchanged at 0.75 percent in its February 28 and March 14 policy decisions. The Kansas City and Dallas Fed banks have for more months sought to raise the discount rate to 1 percent as a step toward restoring the spread between it and the federal funds rate closer to pre-crisis levels. The federal funds rate, the central bank's main policy tool, has been locked in the zero to 0.25 percent range for more than two years. An increase in the discount rate to 1 percent would boost the surcharge for emergency loans to 0.75 percentage points, still less than the 1 percentage-point surcharge before the crisis. (Reporting by Ann Saphir; Editing by Padraic Cassidy)

WASHINGTON, April 12 (Reuters) - The United States posted a monthly budget deficit of $188 billion in March as the government spent more than twice what it took in last month, the Treasury Department reported on Tuesday. The Treasury said the cumulative deficit through the first half of fiscal 2011, which began Oct. 1, was a record $829 billion, about 16 percent higher than the prior year's $717 billion first half shortfall. The monthly budget deficit was the second largest shortfall recorded in any March, outsized only by the $192 billion gap posted in March 2009. The monthly shortfall was just shy of the $189 billion forecast of economists polled by Reuters. (Reporting by Corbett B. Daly; Editing by Neil Stempleman)

Treasury just auctioned $32 billion 3-year notes. Demand as measured by the bid to cover ratio was an above-average 3.25 bids submitted for every 1 accepted by Treasury (vs. 3.07 five auction average). Demand as measured by price/yield was also strong with a high yield of 1.28% which was almost a full basis point below the 1pm "When Issued" yield. Both metrics are indicative of aggressive bidding. From who though? Mainly primary dealers! The street took down an above-average 57.4% of the competitive bid and 25.8% of what they bid on (hit rate). This sizable auction award can be good or bad depending on the demand level of buyers. Direct bidders were awarded 8.9% of the competitive bid vs. the five auction average of 13.2% and indirect bidders added 33.7% of the offering. Both metrics are below average but both accounts tendered large offers, meaning they were interested in buying but only at cheaper dollar prices. It seems like dealers needed to add inventory (high hit rate) while the pre-auction rally seems to have left direct and indirect bidders indifferent. Either way this was a strong auction.

After more than 10 minutes of indecisive trading MBS and TSY's both made their first significant move since the 3yr Note Auction was released with healthy results. 10's broke the 3.49 level that had previously contained rallying yields and now sit at 3.483. FNCL 4.5 MBS broke 101-11 and now sit at 101-13. If these levels are maintained or improved upon, expect reprices for the better from lenders who haven't yet released them, perhaps even a 2nd round from some lenders (even more dependent on holding or improving upon current gains)

Narrowing range... Converging trends... Triangle... Whatever you want to call it, the lows are getting higher and the highs are getting lower for both MBS and TSY's. FNCL 4.5's are narrowing in on something around a 101-11 price and 10yr notes at 3.50. It's not out of the question to see a bit of a bias toward weakness ahead of the auction, but we'll let you know if it's enough to justify concern about reprices for the worse. Otherwise, the auction itself should be the next significant market mover.

We are having roll related technical issues with the day over day MBS price change column on our Dashboard that make it seem like MBS are greatly lagging benchmark Treasuries. Fear not, our price levels are COMPLETELY accurate and 100% LIVE. This problem should be fixed by tomorrow morning.

NOTE: We had roll related technical issues with the day over day MBS price change column on our Dashboard today that made it seem like MBS were greatly lagging benchmark Treasuries. Fear not, our price levels are COMPLETELY accurate and 100% LIVE. This problem should be fixed by tomorrow morning.