MBS MID-DAY: Still Treading Water

A jury delivered Tuesday one of the first major criminal convictions of a mortgage executive stemming from the mortgage bust. Lee Farkas, the former chairman of Taylor, Bean and Whitaker Mortgage Corp., was found guilty on all 14 charges stemming from a seven-year, multibillion-dollar fraud scheme that led to the collapse of his firm and Colonial Bank. Mr. Farkas, who owned airplanes, several homes and dozens of cars, could spend the rest of his life in prison. r. Farkas was "the mastermind of one of the largest bank fraud schemes in history," said Assistant Attorney General Lanny Breuer, in a call with reporters after the verdict. "His shockingly brazen scheme poured fuel on the fire of the financial crisis." Prosecutors touted the conviction by a jury in federal court in Alexandria, Va., one of the few criminal cases the Obama administration has brought against senior executives involved in the mortgage-market bust.

Treasuries have disconnected from the stock lever. WHY? Position Squaring! Investors are getting flat ahead of next week's high risk FOMC meeting. We discussed this behavior in the day ahead. "It looks like we're gonna find out just how nervous the TSY short-base is at these lower dollar prices. This is either an opportunity to cover at lower dollar prices or add new shorts. Position squaring seems like a better idea ahead of next week's FOMC meeting!Cash looks like the smart spot to be in" That is indeed the case. Trading volume is low. Liquidity is lacking and short positions are being covered. Check out my trade flows screen below. Notice prices going up and money flows going down? That means money is exiting the market. When prices are rising and volume is low and open interest is falling...PRICE ACTION = SHORT COVERING. Check out a chart of money flows in this post: http://www.mortgagenewsdaily.com/mortgage_rates/blog/208264.aspx

* MARCH EXISTING HOME SALES 5.10 MLN UNIT ANNUAL RATE (CONS 5.00 MLN) VS FEB 4.92 MLN (PRV 4.88 MLN)-NAR * MARCH EXISTING HOME SALES +3.7 PCT (CONS +2.5 PCT) VS FEB -8.9 PCT (PREV -9.6 PCT)-NAR * MARCH INVENTORY OF HOMES FOR SALE +1.5 PCT TO 3.549 MLN UNITS, 8.4 MONTHS' SUPPLY-NAR * MARCH NATIONAL MEDIAN PRICE FOR EXISTING HOMES $159,600, -5.9 PCT FROM MARCH 2010-NAR * NAR SAYS 40 PCT OF U.S. MARCH EXISTING HOME SALES WERE DISTRESSED SALES, HIGHEST SINCE APRIL 2009 (45 PCT), VERSUS 39 PCT IN FEB

Starting with Intel's big earnings beat, stocks began rallying right after last night's close. S&P futures rose from roughly 1308 to 1326 currently. Bond yields followed rising stocks, but showed a strong aversion to breaking through the 3.40 level in 10's. Although they traded above 3.40 for an hour beginning shortly after 7am, they've since fallen to 3.385. The most interesting thing about this is the treatment of the 3.40 technical. There were two bounces overnight and numerous bounces this morning before finally giving way. Then, as they recovered back under 3.40 there were support/resistance (pivot) bounces as well. So although volume isn't especially high, the technical activity around 3.40 is encouraging. MBS are 6 ticks lower than yesterday's close, currently at 102-00 after coming in the door at 101-29. While all of the above points to weaker rate sheets this morning, it's not painting any sort of picture of a weak bond market. 3.38+ is the next minor short term resistance for 10's.