MBS RECAP: Rally Holds into Close

Despite having pulled back from the more aggressive levels today, MBS and TSYs haven't given up too much ground, and in fact, have held on to some technical support in the after hours trade. 10yr notes saw their high yield marks fall roughly along the same descending line today and the subsequent low yields following the brief test of 3.10 just before noon also fell along an ascending line of resistance. The apex of those converging trends is decidedly lower than the important 3.14 technical level, so we'd certainly consider ourselves in the process of testing for lower yields. That miraculous event would likely need support from a sell-off in stocks, more sovereign debt crisis, and a bond-market friendly read on the FOMC minutes tomorrow. Those will hit at 2pm and with the exception of the 1030 report on oil reserves and the 7am MBA Applications data, it's the sole data point of the day. Fed's Bullard will speak, but given the 7pm time slot, it won't affect domestic bond markets until Thursday, if at all. May 18th, as you may know, it also the anniversary of the 1980 eruption of Mt. St. Helens. In the 2 months that preceded that event in 1980, 10yr notes had fallen over 2%! They extended the rally just slightly into June before beginning a long slog a whopping 5% higher. While we're not looking at anything remotely on that scale, we're certainly dealing with our own version of explosive potential here in 2011. For a more detailed look at tomorrow's events as well as the rest of the week, see the following link:

After rising from 3.10 to just over 3.13, 10yr notes are back into rally mode moving down to 3.114, albeit in lower volume than this morning. FNCL 4.5 MBS are 5 ticks up on the day at 103-17, and while we did see one reprice for the worse on the recent pull-back, that seems a bit knee-jerky in context and bigger-picture, slightly less jumpy lenders still may reprice for the better if you haven't seen one already.

Though the overall direction remains positive for bond markets today, the ranges between the peaks and valleys are expanding as volatility in stocks decreases marked by a .VIX that briefly cracked into the 19's as 10yr notes cracked 3.10. The .VIX closed out yesterday at 18.24 and is almost back to that level now (18.35). As "risk" in general comes back into fashion to a small extent, bonds are waking up next to their 11:30am levels and promptly beginning to chew their arms off. 10's are back to a more reasonable 3.1286 and FNCL 4.5 MBS, a "modest" 4 ticks up on the day at 103-15. Reprices for the better, while still possible, are slightly less likely than they were. In fact, depending on the lender and how close to the 103-19 highs they priced, it wouldn't take too much more weakness to shift risks toward reprices for the worse.

We've already seen news citing this morning's economic data (weak) as a driver of today's bond market rally. But Housing Starts and Industrial Production reports do not drive such rallies and they never have. While the data does perhaps, in some small way, constitute fuel to an already burning fire, today's strength in bonds is really about a broader ongoing shift. Weeks ago, we'd discussed that a 10yr TSY yield that is comfortable moving significantly UNDER 3.15 would likely need to see a stock market that , in general, also looks like it's making a big correction. All one need do to understand what's driving bond yields lower is look at stocks. At this particular point in economic history where relative uncertainty of the post-QE2 trading environment looms, the two markets are not likely to make bigger, broader moves without sticking together. The stock lever is highly highly connected today and the S&P is into the 1320's. In the past, on several occasions, we'd guessed that the S&P would need to break below 1333 and look like there was more weakness in store in order for 10's to get under 3.15 with a purpose. Guess what... That's exactly what we're seeing, but we don't bring this up to toot any horns. Rather, we're simply saying that the current rally "makes sense" in the context of an overall economy coming to terms with its weaker-than-previously-thought outlook. Each tick down in bonds makes stocks wonder if they should be ticking down as well and vice versa. Can this morning's economic data contribute to that? Certainly, but not to enough of an extent to be considered a driver of the rally.

(CBS News) - House Speaker John Boehner is "skeptical" there is "anything the government can do" to alleviate America's housing crisis - arguing that, ultimately, "you're not gonna have more buyers until the economy improves." In an interview broadcast on CBS' "Face the Nation," Boehner argued that government programs aimed at preventing mortgage foreclosures have failed, adding that the only real solution is to wait "until we get our economy moving again." "Over the last couple years, Congress has really set up four programs to help with those mortgage problems," Boehner told Harry Smith. "And unfortunately, none of those have worked. And all they've really done is dragged out the length of time for the market to clear the problems. Which is unfortunate." Following the 2008 mortgage crisis, the Obama administration authorized series of measures aimed at providing relief to Americans who were at high risk of foreclosure. In March, House Republicans voted to terminate Mr. Obama's signature foreclosure prevention program, the $30 billion Home Affordable Modification Program, on the grounds that the program did not work and that the money would be better spent if put toward the deficit. "I was skeptical of these programs when they were approved," Boehner said on "Face the Nation." "I'm even more skeptical today that there's anything the government can do to resolve these problems." If there were an easy answer to the crisis, he said, "then it'd have been passed and Congress would have acted, and the president would have signed it. But when you look at how big the problem is, it's pretty clear to me that the sooner the market works through on this process, the sooner we deal with the problem mortgages and get those homes back on the market and sold."

We've now seen our first reprice for the better on this morning's gains, but realize not all lenders were out with pricing early enough to allow for similar action across the board. Still, the trends are positive and MBS are soaring with 4.5 FNCLs up 7 ticks to annual highs at 103-19. 10yr notes just cracked under 3.10 as stocks test another technical level on their way down, down, down.... S&P currently at 1319.