MBS MID-DAY: Sideways to Slightly Worse

(Reuters) - U.S. Treasury Secretary Timothy Geithner told Congress he would start tapping into federal pension funds on Monday to free up borrowing capacity as the nation hits the $14.294 trillion legal limit on its debt. The U.S. Treasury will issue $72 billion in bonds and notes on Monday, pushing the nation right up against its borrowing cap at some point during the day, a Treasury official said. Geithner said he would suspend investments in two government retirement funds to give the U.S. Treasury additional room to borrow. "I will be unable to invest fully" in the civil service retirement and disability fund and the government securities investment fund, he said in a letter to congressional leaders. The Treasury has said the suspension of the investments and other measures it could take would give the government until about August 2 before it will start defaulting on obligations, such as paying bond investors. Congress is in charge of increasing the debt ceiling, but Republicans are demanding deep cuts to federal spending for the price of their support in doing so. Geithner reiterated previous pleas for action. "I again urge Congress to act to increase the statutory debt limit as soon as possible," he said.

FNCL 4.5 MBS are down 4 ticks on the day now at 103-05. This would only be a reprice concern if a lender put out a rate sheet before 830am Est. 10yr notes have risen to test their 3.20 technical level, currently at 3.195 after bouncing once already on the 3.20 level. Much of this morning's weakness in bond markets has coincided with strength in Stocks. The S&P has recently risen above unchanged on the day, currently at 1338.61. There is no more scheduled economic data for the day.

NEW YORK, May 16 (Reuters) - U.S. homebuilder sentiment was unchanged at low levels in May as on-going foreclosures and tight credit kept buyers reluctant to get into the market, the National Association of Home Builders said on Monday. The NAHB/Wells Fargo Housing Market index held at 16, the group said in a statement. Economists polled by Reuters had expected the index to rise to 17. Readings below 50 mean more builders view market conditions as poor than favorable. The index has not been above 50 since April 2006. High gasoline prices further exacerbated consumers' anxiety, NAHB said. "Builder confidence has hardly budged over the past six months as persistent concerns regarding competition from distressed property sales, lack of production credit, inaccurate appraisals, and proposals to reduce government support of housing have continued to cloud the outlook," NAHB chairman Bob Nielsen said in a statement. (Reporting by Leah Schnurr, Editing by Chizu Nomiyama)

The latest BFRI index, detailing remodeling activity from March 2011, indicates that residential remodeling activity registered the seventeenth-straight month of year-over-year gains, demonstrating that many Americans are continuing to remodel their current homes, rather than purchasing new homes. The BFRI is the only source directly reporting residential remodeling activity across the nation with monthly information derived through related building permit activity filed with local building departments across the country. The March 2011 index shows that all regions except the Midwest posted year-over-year and month-over-month gains. The West posted the largest gains, up 18.5 points (22%) year-over-year and up 5.4 points (6%) month-over-month. The Midwest saw significant drops, down 15.3 points (20%) year-over-year and 3.3 points (5%) month-over-month, perhaps due to a colder winter. The Northeast gained 2.7 points (4%) year-over-year and 4.5 points (8%) month-over-month, and the South improved 7.8 points (10%) year-over-year and 7 points (9%) month-over-mont “The winter of 2010/2011 was one of the worst on record. The economy is continuing to struggle and gas prices have soared, however, consumers in March still continued spending on renovations and home improvements as they drove the remodeling industry to yet another month of solid gains compared to a year ago,” said Joe Emison, Vice President of Research and Development at BuildFax. “Significant improvements in the West continue to drive activity nationally to the best year in remodeling since 2006. Even though the Midwest saw a drop this winter, early data shows that remodeling in all regions will continue to prove out the economic recovery in 2011.”

WASHINGTON, May 16 (Reuters) - Public funding for research and development is valuable and is most effective if it is stable over the long term, Federal Reserve Chairman Ben Bernanke said on Monday. "The primary economic rationale for a government role in R&D is that, absent such intervention, the private market would not adequately supply certain types of research," he said in comments prepared for delivery to a conference on jobs and growth at Georgetown University. Bernanke did not talk about the outlook for the economy or monetary policy in his speech. The United States has benefited in documented examples dating back to the late 19th century from federal research initiatives and government support spurring the emergence of new technologies in areas including agriculture, chemicals, health care, and information technology, he said. (Reporting by Mark Felsenthal; Editing by Andrea Ricci)

While the net overall inflows to US TSYs were $116 bln vs a revised $95.6 bln in February, other components of the latest Treasury International Capital report (TIC) were mixed. Long-term inflows were down from $27.2 bln to $24 bln. Net foreign purchases were also lower than the $30.58 bln in February, falling to $26.78 bln in March. Private capital inflows were up substantially, $126 bln vs $90.5 bln last time, but official inflows were negative (thus "outflows") to the tune of $10 bln vs $5 bln of outflows in Feb. The top two foreign holders of US Debt went different directions in terms of holdings with China reducing Feb's tally of $1.1541 Trillion to $1.1449 Trillion in March and Japan Increasing from $890.3 bln to $907.9 bln. Bond market reaction is limited so far, although TSYs had already been trading near their weaker levels of the day at 3.18. MBS haven't budged since the last round of data at 8:30--still 2 ticks weaker on the day at 103-07.

Both fixed income and equity markets are worse off to start the week. The cause of uncertainty is a strange one - IMF chief Dominique Strauss-Kahn was arrested in New York over sexual assault charges on the weekend. The arrest threatens to create more uncertainty regarding the Greece aid talks, according to one trader. "The IMF has been a key player in helping Europe manage the crisis, and while Strauss-Kahn is only one man, markets don't like uncertainty," said economists at BMO Capital Markets. "The euro weakened on the initial reports of the arrest, but has since rebounded, and is little changed from Friday's close." Meanwhile, the U.S. government is expected to hit the $14.294 trillion debt ceiling Monday, according to the Wall Street Journal. "The Treasury Department plans to announce Monday it will stop issuing and reinvesting government securities in certain government pension plans, part of a series of steps designed to delay a default until Aug. 2," the WSJ says, noting that hitting the limit could set in motion "an uncertain, 11-week political scramble to avoid a default." In bonds the benchmark 10 year note is -4/32 at 99-16 yielding 3.182%. The 2s/10s yield curve is 2bps steeper at 265bps wide. The FNCL 4.5 MBS coupon is -3/32 at 103-06. In stocks, S&P futures are -4.25 (-0.32%) at 1329.75 and Dow futures are -36 points (-0.29%) to 12,520. Oil is -0.87% at $98.78 and gold is +0.03% at $1,494.10. If lenders take down indications and build rate sheets right now, loan pricing should be slightly worse today.

The headline index level for the NY Fed's Empire State Index in May of 11.88 is significantly lower than the 19.85 that economists had predicted and the 21.70 reading in April. Additionally, new orders were down to 17.9 versus and April level of 22.34. But other components of the report are less positive for bond markets, particularly the 69.89 reading of the "prices paid" index versus 57.69 in April. Additionally, respondents think things will be improving in the future as the six-month business conditions component rose to 52.69 versus 47.44 in April. The employment index was moderately improved, from 23.08 last month to 24.73 today. So while the headline index and new orders are ostensibly good for bond markets, the inflation component, in concert with the rosier future outlook should serve to moderate the markets' reactions to this first report of the week. So far, that's what we're seeing with 10yr notes initially trading down in yield, but bouncing back to the middle of this morning's range. FNCL 4.5 MBS are 2 ticks down on the day at 103-07 and seem to be stabilizing there after opening at a heady 103-11.

UPDATED AT 11:25AM