MBS MID-DAY: New YTD Price Highs

With this morning's 9/32nd gain, Fannie Mae 4.0 MBS coupons are now at their highest price levels since November 2010. Rate sheets have improved today as a result. There are two looming threats in the hours ahead that could reverse these additional appreciations. First, Treasury will sell $21 billion 10-year notes at 1pm. Because rates have rallied significantly since the last auction and bond prices are much more expensive, traders could take aggressive action to cheapen up the issue before they buy it. This strategy might not play out until during the actual auction though which means there is a chance the fundraiser does not go well. This would lead to weakness which could force lenders to reprice for the worse. 10yr Treasury yields are currently right on the ledge between November's higher yields and December's lowest. That, in conjunction with other past precedent creates a technical inflection level at 2.96, which is where 10's are currently bid. This technical pivot point could be a tipping point depending on the auction results. The second threat is a constant presence: the stock lever. While stocks are exhibiting bearish big picture sentiment, low volume intraday rallies remain a possibility. If equities muster the energy to attempt a recovery bounce, it would likely come at the expense of Treasuries and MBS.

We think this is a TERRIBLE idea....(Reuters) - An idea once confined to the fringe of the Republican party is seeping into its mainstream -- that a brief default might be an acceptable price to pay if it forces the White House to deal with runaway spending. An increasing number of Republicans do not believe the Obama administration's dire predictions of economic "catastrophe" if the debt limit is not increased. They argue a period of technical default can be managed without plunging markets into chaos. Establishment Republicans including Tim Pawlenty, the former Minnesota governor who announced his presidential candidacy last month, are backing a short-term default if it leads to deep, immediate spending cuts. Jeff Sessions and Paul Ryan, the top Republicans on the Senate and House Budget Committees, have also said failure to raise the debt limit would not trigger immediate catastrophe. Republican Senator Pat Toomey has even introduced legislation directing the Treasury to prioritize debt service over other payments if the debt limit is not raised. It has 22 Republican co-sponsors in the Senate and 98 in the House of Representatives, although no members of the Republican leadership have backed it. David Frum, a former speechwriter for President George W. Bush and a Republican advocate for raising the debt limit, said he holds regular question-and-answer sessions with Republican congressman over a beer. "I have yet to meet one Republican who actually says a failure to raise the debt limit scares them," Frum said. "It is deeply, deeply troubling the number of Republicans I now talk to -- and I include the mainstream -- who think a technical default is manageable. Many on Wall Street disagree. They fear even the briefest default would cause a steep climb in interest rates worldwide and a tumbling dollar, which would tip a fragile economy back into recession and cause financial market upheaval on a scale not seen since the collapse of Lehman Bros

The Refinance index seems to be stuck around the 2500 level, having risen about 500 points during the 2 month interest rate rally. The last two times mortgage rates were this low, the MBA’s Refi Index was operating almost exclusively above the 4000 mark. That was over 7 months ago. The fact that these rates haven’t motivated more refinance activity speaks to several barriers that continue to prevent borrowers from reducing their monthly payment. The Purchases Index fell 4.4% to 182.9 from 191.4 and continues to stagnate at very low levels. Since the tax credit expired, the index has been stuck between 160 and 220, languishing in a sideways. Regarding the barriers that continue to block borrowers from reducing their monthly payments... Two weeks ago we wrote, "Right now we're witnessing the beginnings of a mini-refinance boom in the primary mortgage market, but there has been little activity in the secondary market that would indicate increased rate locking by consumers." says MND's Managing Editor Adam Quinones. "However, if conventional 30-year rates reach 4.25%, we'd expect to see a mini-boom scenario play out. There is much stored demand in the system as many borrowers missed the boat on record low rates in October and early November. This crowd is waiting in the wings for those rates to return. " In reaction to that comment, Ted Rood, a loan originator from MetLife Home Loans added, "One thing to consider regarding refi volume is that HUD effectively ended FHA streamlines over the course of the last year by tightening underwriting guidelines and jacking up monthly MIP fees. After the change, many existing FHA clients have been unable to meet net benefit rules, even when dropping their rate by 1% or more, since their monthly MIP would double on the new loan. So FHA clients don't get to benefit from lower rates and HUD doesn't get new upfront MIPs from existing clients with clean payment histories who want to refinance".

A downbeat speech from Fed Chairman Ben Bernanke had the effect of erasing gains in the stock market and reversing losses in Treasuries yesterday. The flight to safety continues this morning. The benchmark 10-year Treasury yield is three basis points lower at 2.962%, the two-year yield is a tad firmer at 0.397%, and the 30-year yield is three basis points lower at 4.221%. Mortgages are better bid as well with the Fannie Mae 30-year 4.0 MBS coupon +7/32 at 101-12 and the Fannie Mae 4.5 +5/32 at 104-18. Rate sheets should improve on these MBS price appreciations. The stock market isn't looking good. S&P 500 futures are 6 points lower at 1,278.75 and Dow futures are 59 points off at 12,013 - its lowest since March 18. "With five sessions gone so far in the month, none of the Dow, S&P 500 or the TSX have managed a daily gain in June," noted economists at BMO Capital Markets. They said markets are soft again on fears that "the global soft patch may linger and/or deepen." Light crude oil remains under the $100 mark at $98.16 per barrel, 0.94% down from Tuesday. Gold prices are 0.60% lower at $1,534.60. New data didn't from Europe only compounded Bernanke's concerns. In Germany, Industrial production fell 0.6% in April, versus forecasts for a modest gain, and in another report German exports dived 5.5%. "The soft German numbers show that even Europe's powerhouse didn't escape the current global economic soft patch unscathed," BMO said. "That should make the ECB think twice about potentially signalling a July rate hike at Thursday post-policy-meeting press conference." Meanwhile, the World Bank cuts its 2011 global GDP forecast to 3.2% from 3.3%. US growth is expected to be 2.5%, revised down from 2.8%. Japan's forecast was cut to 1.8% from 1.9%. The day ahead is highlighted by two events: a $21bn 10yr note auction at 1pm and the release of the Beige Book at 2pm eastern. http://www.mortgagenewsdaily.com/mortgage_rates/blog/214900.aspx