MBS RECAP: Near 2011 Price Highs

If it seems that we've been alternating busy and slow weeks recently, we have. In general, the "on weeks" for Treasury Auctions have also coincided with comparatively heavy amounts of economic data. Next week follows the same rules with one noticeable exception: Friday's Employment Situation Report. Monday leads off with ISM Manufacturing and Construction Spending. Tuesday is perhaps the lightest day of the week with only Factory Orders on tap. Wednesday and Thursday pick up the pace a bit with ADP Employment, ISM Non Manufacturing, Jobless Claims, Productivity/Costs, and several Fed speakers including Bernanke on Thursday morning. Friday's only report will be the biggie, Employment Situation at 830am. We may well be waiting until then for guidance firm enough to coax bonds out of what's expected to be a range trade.

This letter amends guidance provided in Mortgagee Letter (ML) 2009-53. The guidance in ML 2009-53 removed the one percent origination fee cap for standard FHA insurance programs, except for the 203(k) Rehabilitation Mortgage Insurance and Home Equity Conversion Mortgage programs. This new ML removes the one percent origination fee cap from the 203(k) Rehabilitation Mortgage Insurance Program, and clarifies that the supplemental origination fee permitted under this program is not affected. Effective Date: April 26, 2011 for all case number regardless of when they were assigned...http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/11-18ml.pdf

The overall caveat to the day is the low volume. It's quite low... About half that of yesterday. With that in mind, we're forced to sort of "brush off" a recent dip below 3.29 in 10yr notes. It looks "cool," yes... As long as you don't read anything into it making any profound statement about the strength of the bond market or the impending movement in the week to come. FNCL 4.5's didn't quite make it to their best levels of the day, but at 102-28 are 3 ticks up on the day, close to their 102-29+ high. Reprices for the better wouldn't be the craziest thing we've seen this week, but not likely enough to make an "alert" out of it.

Stocks are the real performers of the day with very little change to positive momentum today. The S&P is making another multi-year high and is currently at 1364.17. While MBS and TSYs are also in the green, they're not quite as well off as stocks. FNCL 4.5's are up 2 ticks on the day at 102-27 and 10yr notes are almost 1 basis point lower, currently at 3.3029. There's really no more significance in today's market movements as the volume largely came and went with yesterday's and Wednesday's events. Only thing to do is turn on cruise control into the close and watch for potential reprices. We're not incredibly likely to see any at these levels.

(Bloomberg) -- Dealers and investors in agency debt and government-backed mortgage bonds should face penalties for failing to complete trades at agreed times, according to an industry group that guides market rules. The Treasury Market Practices Group, which the Federal Reserve Bank of New York helped form in 2007 to offer advice on debt markets, is seeking comments on the proposals, which would follow the introduction of a similar practice for U.S. government bonds that the organization helped create in 2009. Uncompleted trades in agency mortgage securities remain elevated after rising to a record of almost $2.4 trillion during a week in November, according to Fed data. “We strongly believe that, like the fails charge recommended by the TMPG in the Treasury market, these recommendations will lead to more robust markets for agency debt and agency MBS and will serve to broadly reduce the risks associated with high levels of fails,” Tom Wipf, the group’s chairman, said in an e-mailed statement. The central bank’s decision to hold benchmark interest rates at record lows has encouraged failures by reducing the cost of uncompleted trades, while its purchase of $1.25 trillion of mortgage bonds through March 2010 has made it more difficult to find bonds to settle contracts in a timely manner. http://www.businessweek.com/news/2011-04-29/failed-trade-charge-for-mortgage-bonds-proposed-pimco-balks.html

WASHINGTON, April 29 (Reuters) - The U.S. economy is not fully recovered from its deep recession with housing still weighing on growth, Federal Reserve Chairman Ben Bernanke said on Friday in a speech on the importance of community development. "Our economy is far from where we would like it to be," he said in remarks prepared for delivery to a conference. The Fed earlier this week said it will see its $600 billion bond buying program, launched in November to spur a sluggish recovery, through to its planned conclusion at the end of June. The world's largest economy grew at a sluggish 1.8 percent annualized rate in the first three months of the year, but unemployment is still at a lofty 8.8 percent. The depressed housing market is holding back the economic recovery, Bernanke said. Home foreclosure rates remain high and many families find themselves owing more for their homes than the homes are worth. "Obviously, the problems in the labor market and the housing market are not unrelated," he said. (Reporting by Mark Felsenthal; Editing by Andrea Ricci)

C30 loan pricing improved by 16.8bps on average among the five major lenders today. The largest rebate gains are seen in note rates at and below 4.75%. With these improvements it's likely we'll be hearing more reports of attractive 4.75% quotes being offered. The buydown cost is still uber-expensive (95.1bps on average) but the note rate now carries enough rebate to offer it under lender paid commission models, even if the deal is slightly skinny in the banker/retail world. In regard to the reprice outlook, with loan pricing +16.8bps on the day and "rate sheet influential" MBS prices +5/32, gains are already baked in. We'd expect to see lenders reprice for the worse if the FNCL 4.5 hits 102-20. We'd expect reprices for the better if FNCL 4.5s break into the 103 handle. We'd target a sustained move up to 103-02.

Who has been buying securities backed by mortgages? Over the three week period ending on April 13, domestic bank holdings of agency MBS have increased by $26 billion (from $1,093bn to $1,119bn). This sharp rise occurred after bank holdings of agency MBS remained nearly flat for about 3-4 months. In addition, a major portion of the recent spike in bank holdings of agency MBS can be attributed to the purchases of large banks instead of small banks (large bank holdings are up $21.5bn over the three week period ending on 4/13). This is unlike with the prior 3-4 months when agency MBS holdings of small banks continued to increase while those of large banks remained flat or even declined. It is also apparent that domestic banks that were aggressively growing their Treasury holdings (and agency debt) in 2009 and 1H'10 are now preferring agency MBS over Treasuries.

FNCL 4.5's are up 4 ticks on the day now at 102-29. If the day ended right now, that would be the highest closing level of 2011 by 1 tick. 10yr notes are doing fairly well also, down 3/4ths of a bp now at 3.305. The current zone for TSY yields is a highly traveled technical level, but volumes are a bit low today. If volume picked up on a move into the high 3.2's, that would be about the only reason to get excited about current gains, otherwise it's just part of the bigger-picture range trade ahead of next week's NFP and June's termination of QE2. Potential reprices for the better aren't yet very likely. If current trends continue though, it's not out of the question.

As you can see in the chart below...FNCL 4.5 prices are near their highest levels of the year......