MBS MID-DAY: Bonds Better

Companies that only sell loans on a best-efforts basis are not really dealing directly with the hedge cost - the investor is. But don't worry - the investor passes their hedge costs on to the lender. By choosing to sell loans on a mandatory basis (the investor expects that loan, or a similar loan, and the lender is on the hook for it even if it doesn't close) and therefore holding locks until they fund and are eligible for sale, lenders expose themselves to both interest rate and fallout risks. The interest rate risk (rates go up, and you've guaranteed the borrower a lower rate) can be hedged, primarily with mortgage-backed securities. But the very act of buying and selling these MBS's adds to hedge costThere are several other factors that can contribute to increased hedge cost, including mismanaged and inaccurate loan and hedge data, inaccurate pullthrough modeling, bad or out of date pipeline assumptions, and various other operational issues that are not the fault of the old geezer running Secondary Marketing. It helps to know what one's margins are on your rate sheet. No LO expects their company to not price a profit into the rate sheet prices, but it is important for the calculation of hedge cost to know exactly what this profit margin is. Pricing a loan to an investor's mandatory price and delivering it via best efforts, or visa versa, creates a pricing mismatch that is not in the "cost of hedge" category since the price spread between best efforts and mandatory is either added in or subtracted. (And this price spread varies by day, by investor, etc.) Companies know hedging costs will increase and/or secondary marketing margins will decline if loan-level data is incorrect, if loans are extended at no cost, if a loan is underwritten to one investor but then it is forced to be sold to another investor due to an underwriting oversight, locks are not entered into the tracking system, estimating pull through incorrectly, and so on. http://www.mortgagenewsdaily.com/channels/pipelinepress/04282011-hedge-cost-flagstar.aspx

Since hitting 3.31 in heavy volume, 10yr notes have seen a series of higher lows heading back toward a short term technical level around 3.325. Yields bounced higher there, on the way down this morning. After breaking through, they've been bouncing repeatedly lower (was resistance, now support). If it breaks, it's not a critical statement as to the health of the rally, but if it holds firmly, another test of 3.31 could be in the cards. Things have been less eventful in MBS as FNCL 4.5's haven't moved more than a tick, still at 102-22. As expected, rate sheet offerings are aggressive.

* U.S. MARCH PENDING HOME SALES INDEX +5.1 PCT (CONSENSUS +1.5 PCT) TO 94.1 - REALTORS * U.S. MARCH PENDING HOME SALES -11.4 PCT FROM MARCH 2010 *

After both major economic data releases were bond-market-friendly, TSYs and MBS continued a rally that began taking shape after yesterday's FOMC-related events. Volume was high overnight, as the Fed-induced clarity coaxed accounts out of hibernation. New money streamed in steadily as bonds improved in the overnight session and this AM's data has been much more about simply confirming what was already happening as opposed to actually catalyzing a "new" rally. Stock futures have steadily declined since 1030pm. Despite the bullishness, it does seem as if bond markets will contend with some resistance today as benchmarked by 10yr notes at 3.31. Big bounce there so far... in overnight trading, 3.327 would be the first potential pivot suggested, but 3.34 is supported by much higher volume yesterday. As far as MBS, FNCL 4.5's are up 7 ticks on the day at 102-22. They've been pretty stable since reaching their 102-23 high and lender rate sheet offerings this morning should be excellent--near the best levels in 2011.

WASHINGTON, April 28 (Reuters) - Federal Reserve Governor Elizabeth Duke told a community affairs conference in Arlington, Virginia, that the central bank wants to help cities suffering from an excess of foreclosed and vacant properties. In prepared remarks on Thursday, Duke made no comment about monetary policy or about current economic conditions. She said the Fed was trying to help local communities by researching their needs when they face excessive foreclosures and vacancies and would try to bring together banks, policymakers and community leaders to work on solutions. (Reporting by Glenn Somerville, editing by Andrea Ricci)

RTRS *- FANNIE MAE RELEASES MARCH 2011 MONTHLY SUMMARY RTRS * - FANNIE MAE - GROSS MORTGAGE PORTFOLIO DECLINED AT A COMPOUND ANNUALIZED RATE OF 13.0 PERCENT IN MARCH RTRS * - FANNIE MAE SAYS CONVENTIONAL SINGLE-FAMILY SERIOUS DELINQUENCY RATE FELL ONE BASIS POINT IN FEBRUARY TO 4.44% RTRS * - FANNIE MAE SAYS MULTIFAMILY SERIOUS DELINQUENCY RATE FELL FOUR BASIS POINTS TO 0.65 PERCENT IN FEBRUARY RTRS * - FANNIE MAE - BOOK OF BUSINESS INCREASED AT A COMPOUND ANNUALIZED RATE OF 2.6 PERCENT IN MARCH RTRS * - FANNIE MAE - AS OF MARCH 31, GROSS MORTGAGE PORTFOLIO END BALANCE WAS $755.3 BILLION

* RTRS - US JOBLESS CLAIMS ROSE TO 429,000 APRIL 23 WEEK (CONSENSUS 392,000) FROM 404,000 PRIOR WEEK (PREVIOUS 403,000) * RTRS - US JOBLESS CLAIMS 4-WK AVG ROSE TO 408,500 APRIL 23 WEEK FROM 399,250 PRIOR WEEK (PREVIOUS 399,000) * RTRS - US CONTINUED CLAIMS FELL TO 3.641 MLN (CON. 3.680 MLN) APRIL 16 WEEK FROM 3.709 MLN PRIOR WEEK (PREV 3.695 MLN) * RTRS - US INSURED UNEMPLOYMENT RATE FELL TO 2.9 PCT APRIL 16 WEEK FROM 3.0 PCT PRIOR WEEK (PREV 2.9 PCT)

* RTRS - US ADVANCE Q1 GDP +1.8 PCT (CONSENSUS +2.0 PCT), Q4 +3.1 PCT; FINAL SALES +0.8 PCT (CONS +0.6 PCT), Q4 +6.7 PCT * RTRS - US ADVANCE Q1 GDP DEFLATOR +1.9 PCT (CONS +2.0 PCT), Q4 +0.3 PCT * RTRS - US Q1 PCE PRICE INDEX +3.8 PCT (CONS +3.6 PCT), Q4 +1.7 PCT; CORE PCE +1.5 PCT (CONS +1.4 PCT), Q4 +0.4 PCT * RTRS - US Q1 CONSUMER SPENDING +2.7 PCT (Q4 +4.0 PCT), DURABLES +10.6 PCT (Q4 +21.1 PCT) * RTRS - US Q1 MARKET-BASED PCE PRICE INDEX +4.0 PCT (Q4 +1.8 PCT), CORE +1.3 PCT (Q4 +0.3 PCT) * RTRS - US Q1 BUSINESS INVESTMENT +1.8 PCT (Q4 +7.7 PCT), EQUIPMENT/SOFTWARE +11.6 PCT (Q4 +7.7 PCT) * RTRS - US Q1 HOME INVESTMENT -4.1 PCT (Q4 +3.3 PCT), BUS. INVESTMENT IN STRUCTURES -21.7 PCT (Q4 +7.6 PCT) * RTRS - US Q1 EXPORTS +4.9 PCT (Q4 +8.6 PCT), IMPORTS +4.4 PCT (Q4 -12.6 PCT) * RTRS - US Q1 GDP EX MOTOR VEHICLES +0.4 PCT (Q4 +3.5 PCT); MOTOR VEHICLE OUTPUT ADDS 1.40 PERCENTAGE POINT TO GDP CHANGE * RTRS - US Q1 YEAR-ON-YEAR PCE PRICE INDEX +1.6 PCT (Q4 +1.1 PCT), CORE PCE +0.9 PCT (Q4 +0.8 PCT) * RTRS - US Q1 BUSINESS INVENTORY CHANGE +$43.8 BLN (Q4 +$16.2 BLN) * RTRS - US Q1 BUSINESS INVENTORY CHANGE ADDS 0.93 PERCENTAGE POINT FROM GDP CHANGE * RTRS - US Q1 PCE PRICE INDEX RISE FROM Q4 LARGEST SINCE Q3 2008; CORE PCE PRICE INDEX LARGEST SINCE Q4 2009