MBS MID-DAY: First Test of Support

The first instance of support for MBS and TSYs came as the 10yr bounced off a supportive ceiling at 3.095 pct. After Consumer Sentiment and Pending Home Sales Data, volume surged in confirmation of that previous bullish leaning. Yields moved down into the 3.06's and FNCL 4.5 MBS continued their bullish trend on the day, bringing prices to 100-26. If your lender released rates between 8-9am EST, it might not take much more improvement to see reprices for the better.

The Pending Home Sales Index for April fell 11.6 pct to 81.9 versus a consensus of -1.0 pct. Versus April 2010, the index is down 26.5 pct. Add this to the ongoing bleak picture being painted for the housing market's participation in the economic recovery.

NEW YORK, May 27 (Reuters) - U.S. consumer sentiment improved in May as job gains offset high gasoline prices, while inflation expectations diminished, a survey released on Friday showed. Consumers were also more upbeat about the longer term outlook for the economy, the Thomson Reuters/University of Michigan survey showed. Even so, income expectations remained at low levels. The final reading on the overall index on consumer sentiment was 74.3, up from 69.8 the month before and higher than the preliminary reading of 72.4. Economists polled by Reuters had expected the index to be unchanged from the preliminary figure. "Sagging real incomes have made consumers more cautious spenders, with rising gas prices especially troublesome for younger and lower income households," Richard Curtin, director of the survey, said in a statement. "The data continue to indicate the maintenance of a moderate pace of consumer spending during the balance of 2011." The survey's gauge of consumer expectations jumped to 69.5 from April's 61.6. It also came in above a predicted reading of 67.5. The survey's barometer of current economic conditions was 81.9, slipping from April's 82.5 but topping forecasts of 80.2. The survey's one-year inflation expectation fell to 4.1 percent from 4.6 percent, its first decline since September 2010. The survey's five-to-10-year inflation outlook held steady at 2.9 percent. (Reporting by Leah Schnurr)

Both TSYs and MBS came into the day moderately weaker than yesterday's 3pm levels, and those losses extended somewhat following the 830am data. But even if it proves fleeting, the first instance of technical support at new, better levels appears to be taking shape. We'd mentioned 3.095 last night as a logical technical support for 10yr notes and that's where we got our support for this morning's weakness. Similarly, FNCL 4.5's spent a lot of time yesterday at 103-24, and never dipped below upon reaching it. That's been the level for the MBS bounce so far this morning as well. Volume is not what it was yesterday, but it's certainly not "light." Whether or not it's the most significant part of the day remains to be seen in about half an hour when the next 2 economic reports come out. For now, it looks like a golf-clap of confirmation to yesterday's thunderous applause.

WASHINGTON, May 27 (Reuters) - U.S. consumer spending rose less than expected in April as high gasoline prices continued to squeeze household budgets, according to government data on Friday which also showed annual inflation accelerating at its fastest pace in a year . The Commerce Department said consumer spending increased 0.4 percent, rising for a 10th straight month, after a downwardly revised 0.5 percent gain in March. Economists polled by Reuters had expected spending, which accounts for about 70 percent of U.S. economic activity, to rise 0.5 percent last month after a previously reported 0.6 percent rise in March. When adjusted for inflation, spending nudged up 0.1 percent last month after gaining 0.1 percent in March. The report suggested consumer spending maintained its weaker tone into the second quarter as high gasoline and food prices continue to stretch household finances. Consumer spending rose at a 2.2 percent rate in the first quarter, braking sharply from a 4 percent pace in the October-December period. But a recent cooling in gasoline prices should ease some of the pressure on households and boost spending in the months ahead. High food and energy prices in April kept inflation pressures simmering, with the personal consumption expenditures price (PCE) index rising 0.3 percent after advancing 0.4 percent in March. Compared to April last year, the index was up 2.2 percent, the biggest rise in a year, after increasing 1.8 percent in March. The core PCE index -- excluding food and energy - increased 0.2 percent after rising 0.1 percent in March. (Reporting by Lucia Mutikani, Editing by Andrea Ricci)

Treasuries are backing up slightly after a strong rally pushed yields to new 2011 lows on Thursday. And mortgages are following the leader, which means loan pricing will likely deteriorate this morning. The benchmark 10-year is yielding 3.08% in early trading after closing at 3.05% on Thursday. The 2-year yield is up 1.2bps at 0.50% and the 30-year yield bond is up 3.1bps to 4.25%. Current coupons pass-throughs are weaker as well. The FNCL 4.0 is -5/32 at 100-22 and the FNCL 4.5 is -3/32 at 103-26. CC yields spreads are tighter on the open. "A more hopeful tone seems to have taken hold in global markets this morning as the G8 wraps up their 2-day summit in France and as the U.S. heads into the long weekend," wrote economists at BMO Capital Markets. "It looks like a line in the G8 communiqué is helping set the positive tone." The G8 said the global recovery is gaining strength. It viewed the debt crisis as of utmost importance and agreed on certain actions to bring it under control and foster employment. Meanwhile, Fitch Ratings cut its outlook on Japanese debt to negative. The move didn't appear to have much impact in Asia, where equities were mixed, as the decision merely put Fitch on par with Moody's and S&P. Equities are up before the opening bell: S&P 500 futures are 2.50 points higher at 1,329 and Dow futures are 9 points better at 12,418. Light crude oil is +0.58% at $100.81 per barrel, while gold prices are +0.26% at $1526.80. The bond market will close early at 2pm today...we'd expect traders to check out around 10:30am though.