MBS MID-DAY: Creeping Higher and Higher

NEW YORK, May 9 (Reuters) - Concern about plans for a fundamental review of the bailouts given to Europe's high debtor nations hit European stocks on Monday and drove up the bond yields of troubled euro zone economies. The euro itself rebounded from recent sharp losses. Commodity prices also firmed, bouncing back from their biggest weekly drop since 2008 as the dollar eased back. But Wall Street recovered from recent losses, opening slightly higher. The S&P 500 .SPX was up 0.1 percent. The European Union is looking to lower interest rates on bailout loans to Greece and Ireland and is working on a second rescue for Athens in a chaotic effort to prevent a disorderly debt restructuring. Rumors about a full-on restructuring of Greek debt have roiled European markets for several weeks now. The calls for lower rates came after a select group of top euro zone policymakers held not-so-secret talks in Luxembourg on Friday. Meanwhile, Standard and Poor's cut Greece's rating to B from BB- on Monday, dragging it further into junk territory over concerns that a debt restructuring is increasingly likely. "In our view, there is increased risk that Greece will take steps to restructure the terms of its commercial debt, including its previously-issued government bonds," the agency said in a statement, warning that more downgrades could come.

(Reuters) - Standard and Poor's cut Greece's rating to B from BB-, dragging it further into junk territory over concerns that a debt restructuring is increasingly likely. "In our view, there is increased risk that Greece will take steps to restructure the terms of its commercial debt, including its previously-issued government bonds," the agency said in a statement, warning that more downgrades could come. It said its projections suggest that principal reductions of 50 percent or more could be needed to restore Greece's debt burden to a sustainable level. Greece, whose fiscal slippages triggered Europe's debt crisis, is rated junk by all three major rating agencies. (Reporting by Ingrid Melander)

On these data-less days, it makes sense to watch for potential connection between stock prices and bond yields and though we've had to wait a bit, it looks like we might be getting a bit of correlation now. MBS and TSYs continued to improve into and after the stock market open with 10yr notes now at 3.151 and FNCL 4.5's up 2 ticks on the day at 103-17. Lender pricing has been varied between slightly better and slightly worse. For now, it seems that something near 3.15 in 10yr yields is a resistance level that could continue to be in effect if stocks stay in the green (and they are just barely in the green right now).

The movements seen between Friday afternoon and this morning are underwhelming, especially considering Friday's best-of-the-year levels. 10yr notes rose to 3.19 earlier, but have since come down to 3.166. FNCL 4.5's are currently unchanged at 103-15 while 4.0's are down 2 ticks at 100-10. This morning is an almost epic "morning after" where markets consider how they feel about Friday's rally. The fact that sub-3.20 levels haven't caused immediate nausea and rejection is a sign of relative acceptance--one that is currently translating well to MBS. BUT, this shouldn't be taken as a sign that the road ahead is easy! The rally brought 10's to a resistance level that goes back to early-mid 2009 and lies roughly at the center of the entire trading range between the late 2008 lows and early 2010 highs (2.06 - 3.99). Only ONE TIME since the initial crash have 10's crossed current levels into lower yields. Of course, this doesn't necessarily mean it couldn't happen again, but it's not the sort of move we'd expect to be "confirmed" without guidance from something like some intense stock market selling, surprisingly strong TSY auctions, or surprisingly weak economic data across the board. It's also possible that the impending completion of QE2 is the ultimate guidance giver, though we could see technical levels break in anticipation of post-QE2 trading sentiment. The point to all this is simply that we'd suggest not taking any bullishness for granted. Respect the extent to which we've rallied so far and be ready to act if things take a rapid turn in the other direction.

Home values posted the largest decline in the first quarter since late 2008, prompting many economists to push back their estimates of when the housing market will hit a bottom. Home values fell 3% in the first quarter from the previous quarter and 1.1% in March from the previous month, pushed down by an abundance of foreclosed homes on the market, according to data to be released Monday by real-estate website Zillow.com. Prices have now fallen for 57 consecutive months, according to Zillow. Last year, the housing market showed signs of improving as price depreciation slowed in some markets and stabilized in others. In response, a number of economists began forecasting that housing would hit a bottom in late 2011, then begin to recover. But the improvements, spurred by federal programs that gave buyers up to $8,000 in tax credits, proved fleeting. Sales collapsed when the credits expired last summer, and prices in many markets have been falling ever since. While most economists expected sales to decline after tax credits expired, the drag on the market has been greater than many anticipated. "We expected December and January to be bad" as the market reeled from the after-effects of the tax credit, said Stan Humphries, Zillow's chief economist. But monthly declines for February and March were "really staggering," he said. They indicate "a reflection of the true underlying demand, which is now apparent because most of the tax credit is out of the system, and it's being completely overwhelmed by supply." (see full story:)