MBS RECAP: Slow Session

April 20 - Standard & Poor's Ratings Services said today that it revised its outlooks on the debt issues of Fannie Mae, Freddie Mac, the Federal Home Loan Bank System, and the Farm Credit System Banks to negative from stable while affirming our respective debt issue ratings. We also revised our outlook to negative from stable for 10 of the 12 individual Federal Home Loan Banks while affirming their 'AAA' long-term counterparty credit ratings. The outlooks on the Federal Home Loan Banks in Chicago and Seattle were not affected, nor were the ratings on the individual Farm Credit banks. These changes reflect our revision of the outlook on the United States of America to negative from stable (AAA/Negative/A-1+; please see United States of America 'AAA/A-1+' Rating Affirmed; Outlook Revised To Negative, published April 18, 2011, on RatingsDirect for further details). Per our government-related entity (GRE) criteria, the ratings on the GREs noted above are constrained by the long-term sovereign rating on the U.S. We derive our opinion of the support included in the ratings based on the links and roles attached to the supporting entity, the U.S. government. We also factor direct and indirect sovereign risks, such as the impact of macroeconomic volatility, currency devaluation, asset impairment, or investment portfolio deterioration, into our stand-alone credit profile ratings. We will not raise our outlooks and ratings on these entities above those on the U.S. government as long as the ratings and outlook on the U.S. remain unchanged. Conversely, if we were to lower the ratings on the U.S., we would also likely lower the ratings on the debt of these GREs as well as our issuer credit ratings on relevant individual GRE entities.

It's been a long day for bonds as they try to battle back against some inherent weakness. for the first time since 9:15am, FNCL 4.5's are at 102-00, just on the edge of being low enough for reprices for the worse. While this isn't likely to be a widespread phenomenon at these levels, it's possible for a few lenders, and would become more probable if prices get lower. The caveat to all this is that the losses have come in late-day, low low volume, illiquid trading.

MBS and TSYs have weakened a bit into the 3pm Treasury close despite no major move from stocks. Since the S&P downgrade of the outlook for US Debt, the stock lever has been noticeably disconnected relative to it's prior performance. 10's are currently at 3.397, hoping to catch some low-volume support from the 3.40 technical. FNCL 4.5's are a few ticks worse than previously reported, now down 4 ticks on the day at 102-02. Despite this, reprices for the worse are not incredibly likely with MBS being down only an eighth on a day where most lenders released rates an eighth worse this morning. We'd continue to favor the 102-00 level as the more likely line in the sand for reprice risk.

(Reuters) - Wells Fargo & Co (WFC.N) expects the U.S. housing market to remain mixed as consumers digest conflicting news about the economy, Chief Financial Officer Tim Sloan said on Wednesday. "You've got consumers getting good economic information one week and then another week it's not as good. There's a lot for the consumer to be concerned about, for certain," Sloan said in an interview following release of the bank's first-quarter results. He said the housing market will "continue to be mixed" and "the primary driver for the housing industry is the economy and jobs." San Francisco-based Wells Fargo, the fourth-largest U.S. bank and the largest U.S. housing lender, reported lower first-quarter revenue, sending its shares down 4.9 percent.

We've seen more mini-bounces off 3.40 as a supportive ceiling for 10yr notes than any other horizontal yield level in recent memory. Rather than speak to some significant technical victory, it more likely connotes a lack of volume and liquidity in a market devoid of motivational economic data; a market in which it makes more sense to adhere to well-traveled technical levels until data or events can offer some more convincing guidance than MBA Applications and Existing Home Sales. In quantifiable terms, 10yr futures contracts traded are just over 700k at the moment, and may crest 800k by 5pm if they're lucky. Yesterday's total was 923k, and any day under 1 mil is a bit light these days. Monday was 1.452 mil for example. In short, volume is among the lowest days of the year (bottom 20%). With limited supply and decreasing volatility throughout the day, MBS have been content to hold and/or increase recent improvements vs benchmarks. FNCL 4.5's are a scant 2 ticks down on the day at 102-04, only 1 tick from their highs. Treasuries and MBS may both, however, be forced to commit to one direction or the other in the near future as the 10yr benchmark has two trends that are converging: a horizontal trend capped near 3.40 (it's gone slightly higher, but not on an hourly chart), and an uptrend of yields that can be seen coming off yesterday's last yield low at 3.35 and connecting the other two prominent lows today. Looking at a longer term chart, we're either going to continue the bullish trend that began on 4/8 or this bearish trend starting with the 3.35 low will prevail and reverse the broader bullish trend.

Fed Chairman Ben Bernanke on Financial Literacy: "The recent crisis demonstrated the critical importance of financial literacy and good financial decision making, both for the economic welfare of households and for the soundness and stability of the system as a whole. Good financial choices depend on reliable and useful information, presented in an understandable way. Essential components of personal financial management include an understanding of how to budget strategically, use credit, save to build personal wealth, and shop for and choose suitable financial products. The Federal Reserve recognizes that informed, educated consumers not only achieve better outcomes for themselves but, through careful shopping for and use of financial products, help to increase market efficiency and innovation. Our approach to assisting consumers to successfully navigate the financial marketplace has been three-pronged: First, we have worked diligently to foster financial and economic education. Second, we conduct research on consumer decisionmaking that helps to identify what works in financial education and informs the regulatory process. Third, in recognition that basic financial knowledge is not sufficient to safeguard people from fraud and deceptive practices, we have promulgated strong consumer protection rules and consumer-tested required financial product disclosures to ensure they present information clearly and in a useful format. We vigorously enforce consumer protection laws to ensure that providers of consumer financial products act fairly and comply with the spirit and letter of the rules."

About an hour ago, 10yr notes made it back to their best levels of the morning after rallying from support near 3.40. But just as quickly as they had rallied, yields rose to test similar support just under 3.40. That's been holding so far with current levels at 3.397, but there is not yet clear evidence that a "bounce" is materializing. MBS stretch their outperforming legs into the selling pressure down only 4 ticks on the day at 102-02. Reprice risk would pick up if FNCL 4.5's drop below 102-00.

At 12:30 p.m. (EDT) on Thursday, April 21st, U.S. Housing and Urban Development Secretary Shaun Donovan and U.S. Department of Energy Secretary Steven Chu will launch new pilot program intended to offer homeowners low-cost financing to help make their homes more energy efficient. The Federal Housing Administration’s (FHA) new PowerSaver Program will offer homeowners up to $25,000 to finance the installation of insulation, duct sealing, replacement doors and windows, HVAC systems, water heaters, solar panels, and geothermal systems.

After 10yr notes initially got back under 3.40 this morning, yields proceeded to rally almost to 3.37. But after stocks opened and were able to hold gains indicated from futures trading, TSY's edged higher in yield until reaching "old friend" technical support just shy of 3.40--yet another "bounce" that edifies the significance of that mark. MBS appreciate the supportive movement and have returned to their highs of the day at 102-05. 10yr notes are almost back to their best levels, currently at 3.380. So far, stocks have stalled before reaching 1333 in the S&P. In terms of the stock lever, failure by the S&P to breach 1333-ish would be a net positive for bond markets.