MBS RECAP: 5/4/2011

(Reuters) - The U.S. Treasury will sell $72 billion in debt next week, it said on Wednesday, but warned it would have to delay or reduce future offerings if Congress does not raise the nation's borrowing limit before August. Next week's sale of bonds and notes, which was unchanged from prior plans, will bring the United States to the edge of its legal borrowing limit of $14.294 trillion, which it said would be reached on May 16. The Treasury is so close to the ceiling already that it will start to employ a series of emergency measures on Friday to allow the government to meet its obligations, such as Social Security and debt interest payments. It plans further actions on May 16 to free up more borrowing authority. The measures will give Congress until around August 2 to reach a deal to raise the limit. "That is the date that we estimate we will run out of ability to meet our obligations," said Mary Miller, Treasury assistant secretary for financial markets. (By David Lawder and Rachelle Younglai). *see link for additional content:

Just an extension of the themes introduced in the last live update. Stocks, with an hour and a half left to go, look more and more certain to confirm a bounce of 1342 in the S&P. That bounce pulled TSY yields higher initially, but they hadn't yet broken a trendline that was passing through the lower 3.23 range (this had been the lower line in a trend channel containing all 10yr yield movements since 4/18, broken this morning and now tested from the other side, aka "pivot"). The trading that has transpired since then is going a long way to recognize BOTH the stock bounce AND the bond resistance. 10yr yields have knocked their heads against 3.23 on several noticeable occasions so far and could go as high as 3.236 without really breaking the line. Even then, that would need to happen with the sort of volume we're not too likely to get before the 3pm TSY market close. We'll keep an eye on volume and movement to see if something interesting does happen, and if so, will update you. Otherwise, today's first round obviously goes to bonds, and the 2nd round remains a draw until further notice. Implications for MBS? Nil... We had mentioned that the support would need to fail in 10's before MBS would take much notice. Indeed, trading has been slow and exceedingly uneventful for MBS as FNCL 4.5's cling closely to 103-02. Several lenders have repriced for the better and that remains a possibility at these levels.

We've established tons of connectivity in the stock lever... Connectivity between TSYs and MBS is another degree removed from that, so current movements in stocks have less of an effect on MBS than TSYs. That said, it has been enough of an effect to put the brakes on today's bond rally for the past hour or so. S&P's bounced on an important pivot point with strong past bounces on 2/18 and 4/27 (first as resistance, then support). As stocks made that supportive bounce today and headed higher, 10yr yields followed (low 3.21's to nearly 3.23). TSYs have technical considerations of their own however with a well traveled resistance line that has been trending lower since high volume marks on 4/18. There have been numerous "touches" but no clear breakouts until today. This gives TSYs a pivot point of their own, in the form of this downwardly sloped diagonal line that had, until today, been resistance. It serves as a great line in the sand as to when MBS might be forced to stand up and take notice of shifts in underlying benchmarks. Through the rest of the day, that line passes through an area in the low to mid 3.23's. If 10yr yields are able to bounce there (supportive, pivot bounce right? because it "used to be a floor for yields" and now we're hoping it acts as a "ceiling," hence: pivot). We'd watch that level as a reasonably likely line in the sand and let you know if we bounce or break with enough volume for it to matter. Reprices for the better have been seen but are slightly less likely now with benchmarks selling and MBS off their highs.

Today's interest rate rally has been fueled by bearish traders who are covering their short positions as benchmarks rally through technical resistance levels. We describe this behavior as "forced buying". It's an early indication of snowballing in a friendly manner . Although this position squaring is encouraging it must be intensified by real money investors (as opposed to fast$) who need to move their funds "down in coupon". It must also be backed by a worsening outlook on economic fundamentals. We'll have the opportunity to see just how receptive the bond market is to a sustained shift "down in coupon" when the Employment Situation Report is released on Friday. If the market is resistant to confirming the recent rates rally, we could be witnessing a big ole "buy the rumor, sell the news" rally right now. From that perspective, until a breakout is confirmed we will remain defensive of gains. READ MORE: http://www.mortgagenewsdaily.com/mortgage_rates/blog/210063.aspx

Loan pricing is coming out 3.8 bps better on average. If your initial rate sheet came out at 9:45am or before, reprices for the better remain possible as MBS are holding their gains, currently up 3 ticks on the day at 103-02. This is the first time FNCL 4.5's have traded in the 103's this year. Despite that, benchmarks are severely outpacing MBS into this rally. 10yr notes are 11 ticks better on the day, dropping the yield to 3.2104 at the moment, thus far, confirming a breakout of the recent trend channel. The stock lever is very well connected at the moment, so look for further stock losses to support these recently heady levels in Treasuries, and conversely, a big recovery in stocks to give them pause.