MBS MID-DAY: More Price Volatility

While still positive on the day, production MBS coupons are 6/32 off their morning price highs as traders take short-term profits off the table ahead of the 12:30 FOMC Statement. The Fannie Mae 4.0 is currently +3/32 at 100-24 after touching 100-30 early in the session. If you were awarded reprices for the better yesterday afternoon, your loan pricing is mostly flat to slightly better today. If you were not awarded reprices for the better yesterday afternoon, your rate sheet looks 10-30bps stronger this morning. With MBS indications moving lower we are now on the watch for reprices for the worse. A dip into negative territory (100-21 in Fannie 4.0s) would likely lead us to ring the alarm bells.

(Reuters) - The number of U.S. homes likely to hit the market soon fell compared to last year due to fewer new delinquencies and a high level of distressed sales, a real estate research firm said on Wednesday. CoreLogic reported that the so-called shadow inventory of homes in the three months to the end of April declined to 1.7 million homes. That's equivalent to a five months' supply and is down from 1.9 million in the same time frame the year before. It is also down from the peak level of 2 million homes seen in the three months up to January 2010, CoreLogic said. Since its collapse, the housing market has remained a drag on the economy and economists say a recovery in the sector can only take place once the overhang of distressed properties is sold off. CoreLogic estimates the supply of homes yet to come up for sale by calculating the number of properties that are not currently listed on multiple listing services and are delinquent by 90 days or more, in foreclosure and owned by lenders.

(Reuters) - The Federal Reserve will likely nod to renewed weakness in the U.S. economy in a post-meeting policy statement on Wednesday, but don't expect policymakers to do anything about it any time soon. That's in part because underlying inflation, considered too low in the period preceding the launch of the central bank's most recent round of bond purchases, has been rising. Moreover, the central bank faced intense criticism as its second round of so-called quantitative easing -- a $600 billion bond purchase program known as QE2 -- sparked accusations that policymakers were sowing the seeds for future inflation. The U.S. economic recovery, nearing its second anniversary, appears to be losing steam. Gross domestic product grew at just a 1.8 percent annual rate in the first quarter, and the second quarter's performance is not looking much better. Fed Chairman Ben Bernanke, in his second-ever news conference after the meeting, will most probably reiterate his forecast for a rebound in the second half of the year. "I would expect that the chairman would be pretty firm in his view that the recovery will proceed in the second half," said Michael Gapen, an economist for Barclays Capital. Still, likely downward revisions to the central bank's growth forecasts for 2011, which at 3.1 percent to 3.3 percent as of April are now looking a bit lofty, will offer a public acknowledgment that the economy continues to disappoint............ Currently the Fed is projecting 3.1 to 3.3% growth in 2011. MND sees the Fed lowering their outlook to 2.5 to 2.9%.

(Reuters) - The head of PIMCO, the world's biggest bond fund, predicted that Greece and other European economies would default on their debts to resolve their problems as the euro area deals with its debt crisis. Greece's government won a vote of confidence late on Tuesday, a crucial step toward securing further short-term and longer-term financial aid from the European Union and the IMF as the country tries to avoid the euro zone's first sovereign debt default. "For the next three years, we're going to see different economies work out different problems. For European economies, especially Greece, it would be through default," Mohamed El-Erian, chief executive of PIMCO, told reporters in Taipei on Wednesday via a video conference. He didn't identify which economies other than Greece he was referring to. El-Erian has suggested in the past that Greece would default and that Europe risks wasting money for nothing by pumping billions of dollars into the ailing economy. "Nothing has been done to enhance growth," he said. "No single (Greek) indicator has shown strength. They are afraid a restructuring would hurt European banks." He doubted a Greek default could trigger another global financial crisis. "Ireland, Portugal, Italy and Spain would have to be involved. But Greece is too small in terms of economic impact," El-Erian said.

The S&P 500 experienced its biggest gain in two months on Tuesday but trading is now back in caution-mode ahead of the Federal Reserve's monetary policy statement and press conference with chairman Ben Bernanke. The benchmark 10-year Treasury yield is 3.5 points lower in early trading at 2.945% and production MBS coupons are 8/32 better in price with the Fannie Mae 4.0 bid at 100-30. If lenders were to take down MBS indications and build rate sheets right now, loan pricing would be 20 to 30bps better. This would include rebate appreciations that were not passed along yesterday after MBS recovered from early session weakness. The Euro recovered a bit overnight after Greek PM George Papandreou and the Socialist party won a confidence vote in parliament, paving the way for new austerity measures and a second financial aid package. "Considering Papandreou made it perfectly clear ahead of yesterday's vote that he would push for new austerity measures in order qualify for a second bailout package, it would appear that he should have enough support to pass the measures," said economists at BMO Capital Markets. Global financial markets don't seem to be convinced that this vote of confidence in Papandreou will be enough to save Greece from defaulting on their debt though. Since making modest positive progress overnight, the Euro is now 0.17% weaker vs. the U.S. dollar and Greek debt spreads have largely failed to rally against U.S. Treasuries (rally stalled at 1,304bp technical resistance). And S&P 500 futures are 2.50 points lower at 1,285.50 and Dow futures are 21 points lower at 12,067. The market had been improving for the prior four days.