MBS MID-DAY: Auction Concessions and Stock Lever

Consumer Confidence in June fell to 58.5 versus a revised 61.7 in May and a consensus of 60.5. Both the "present situation" and "expectations" components of the index have experienced continuing declines in recent months with the former down from 39.3 to 37.6 and the latter down from 76.7 to 72.4. Inflation expectations ticked down from a revised 6.5 in May to 6.0 in the current report. There was also a slight shift in 6 month income expectations with fewer consumers expecting income to increase and more consumers expecting income to decrease. Still, almost 70% continue to see their income unchanged.

We have good news and bad news. The bad news is benchmark Treasury yields are rising and "rate sheet influential" MBS coupon prices are falling. The good news is MBS are outperforming Treasuries. The 10-year note is -5/32 at 2.947% (+1.8bps) but the Fannie Mae 4.0 MBS coupon is only -2/32 at 100-30. That means, if lenders build rate sheets right now, loan pricing would be flat to marginally worse. Unfortunately that doesn't include a cushion to protect against intraday volatility, which has been abundant lately. From that perspective, loan pricing could potentially deteriorate by as much as 25bps on first release today. There are several events influencing the broader market right now. First and foremost, bond investors are dealing with another round of Treasury auctions this week. At 1pm today Treasury will sell $35 billion 5-year notes. Increased debt supply in the open market tends to pressure benchmark Treasury and production MBS coupon prices lower. Second, ongoing drama in Greece remains a constant threat to equities, which means Treasuries could benefit from a "flight to safety" at any moment if a negative news headline prints. It also means Treasuries could lose their bid if positive news headlines print, which would be a bad thing for the best loan pricing of the year. In the more immediate future, Consumer Confidence data will flash at 10am. This is one of the first opportunities we'll have to digest June economic data and should set a tone for trading activity in the weeks ahead (Might not notice it today though, auctions and Greece headlines are stealing the spotlight.)

(Reuters) - U.S. single-family home prices dipped modestly in April, pointing to signs of stabilization in the battered housing market at the start of the spring buying season, a closely watched survey said on Tuesday. The S&P/Case-Shiller composite index of 20 metropolitan areas dipped 0.1 percent on a seasonally adjusted basis. A Reuters poll of economists had forecast a decline of 0.2 percent. On a non-seasonally adjusted basis, however, the index rose 0.7 percent, its first advance in eight months, the report said. "The seasonally adjusted numbers show that much of the improvement reflects the beginning of the spring-summer home buying season," David Blitzer, chairman of the index committee at Standard & Poor's, said in a statement. "It is much too early to tell if this is a turning point or simply due to some warmer weather." The excess amount of houses for sale, ongoing foreclosures, tight credit and weak demand have kept the housing market on the ropes even as other areas of the economy start to recover. Prices in the 20-city index fell 4 percent year over year, slightly worse than expectations for a drop of 3.9 percent. (Reporting by Leah Schnurr; Editing by Padraic Cassidy)

UPDATED AT 11:33AM...