MBS MID-DAY: Follow the Leader

After the release of ISM's Non-Manufacturing index for June, which declined 1.3 points and missed missed the consensus, MBS rallied to nearly their best levels of the day. The S&P index fell to its lowest mark in two days. But both of those trends have paused for now with Fannie Mae 4.0 MBS at 100-09 after hitting 100-11 moments ago. S&P's are about a point off their lows seen moments ago. That leaves things somewhat sideways for now with no major risks posed to whatever rate sheets are out so far today.

The NMI registered 53.3 percent in June, 1.3 percentage points lower than the 54.6 percent registered in May, and indicating continued growth at a slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index decreased 0.2 percentage point to 53.4 percent, reflecting growth for the 23rd consecutive month, but at a slightly slower rate than in May. The New Orders Index decreased by 3.2 percentage points to 53.6 percent. The Employment Index increased 0.1 percentage point to 54.1 percent, indicating growth in employment for the 10th consecutive month and at a slightly faster rate than in May. The Prices Index decreased 8.7 percentage points to 60.9 percent, indicating that prices increased at a slower rate in June when compared to May. According to the NMI, 15 non-manufacturing industries reported growth in June. Respondents' comments are mixed about the business climate and vary by industry and company. The most prominent concern remains about the volatility of prices."

(Reuters) - No investors held long positions in U.S. Treasuries as of July 5, the first time there were no outright longs since February 2005, according to a survey from J.P. Morgan Securities released on Wednesday. The share of investors who said on Tuesday they were long, or holding more Treasuries than their portfolio benchmarks, fell to zero from 4 percent the week before, the survey said. Investors remained predominantly neutral on Treasuries according to the survey, with the share of investors who were neutral, or owning Treasuries equal to their benchmarks, rising to 75 percent from 71 percent last week. The share who were short on Treasuries, or holding less than their benchmarks, was unchanged at 25 percent. (Reporting by Chris Reese; Editing by James Dalgleish)

The federal government is readying its first retreat from the mortgage market, with the size of loans eligible for government backing set to decline in October.As an emergency measure three years ago, Congress raised to as high as $729,750 the maximum loan amount that Fannie Mae, Freddie Mac and federal agencies could guarantee.That made it easier—and cheaper—for borrowers in pricey housing markets to obtain mortgages, because the government guarantees that investors receive payments on those mortgages even if homeowners default.Now those limits are set to decline modestly in hundreds of counties across the U.S. as the government attempts to reduce its outsized footprint in the mortgage market and create room for private investors to compete. Government-related entities stand behind more than nine of 10 new mortgages, and taxpayers have sunk $138 billion into Fannie and Freddie, underscoring the eagerness to dial down the government's share.The new limits will vary widely by location, but will drop to $625,500 in top-tier markets such as New York, Los Angeles and Washington, D.C.Even though the new limits won't take effect until Oct. 1, some lenders are already warning borrowers that they will stop accepting applications for loans that exceed the new limits much sooner, to ensure the loans are funded before the cutoff date.Industry groups are making the case on Capitol Hill that reducing current limits in some of the largest markets is "the exact wrong way to go," said Jerry Howard, president of the National Association of Home Builders. But Obama administration officials say the limits should fall as scheduled, and Republican lawmakers have introduced measures to shrink the Federal Housing Administration's reach more aggressively.Had the lower limits been in place last year, Fannie and Freddie would have backed 50,000 fewer loans, according to the Federal Housing Finance Agency.

The number of planned job cuts announced by U.S.-based employers increased by 4,297 or 11.6 percent to 41,432 in June. Despite the increase, the overall pace of downsizing through the first half of 2011 is at the lowest level since 2000, according the latest report on downsizing activity released Wednesday by global outplacement consultancy Challenger, Gray & Christmas, Inc. The June increase is the second in as many months. Announced layoffs in May were up 2.0 percent to 37,135, after falling to a four-month low of 36,490 in April. The two consecutive months of increased job cuts did little to impact the overall slow pace of downsizing. For the quarter ending on June 30, a total of 115,057 job cuts were announced, down 12 percent from 130,749 in the first quarter and 1.2 percent lower than the second quarter in 2010 (116,494). Employers have now announced 245,806 planned job cuts this year, 17.4 percent lower than the 297,677 cuts announced in the first half of 2010. The six month total is the lowest since 2000, when 223,421 job cuts were tracked between January and June. “The employment picture remains a bit cloudy. Continued slowness in the pace of job cuts is certainly promising. However, hiring is coming in spurts and is not quite robust enough to make a significant dent in unemployment,” said John A. Challenger, chief executive officer of Challenger, Gray & Christmas. “We saw relatively strong payroll gains in February, March and April, only to see much slower growth in May. The next three or four months of employment and hiring data will be important indicators of whether the expansion has prematurely hit the brakes or if the dips in job creation are simply bumps on the road to recovery,” he added.

(DOW JONES) - The volume of mortgage applications filed in the U.S. last week fell a seasonally adjusted 5.2% from the previous week as refinancing activity dropped to its lowest level in two months, the Mortgage Bankers Association reported Wednesday. "Refinance activity, already constrained by a smaller pool of eligible borrowers, declined in response to the higher rates," said Michael Fratantoni, MBA's vice president of research and economics, referring to mortgage rates. Interest rates on the benchmark 30-year fixed mortgage rose to their highest level in more a month, which Fratantoni attributed to stronger economic data and the end of the Federal Reserve's second round of quantitative easing. Refinance volume dropped 9.2% to its lowest level since May 6 in the MBA's latest weekly survey, which covers more than half of all U.S. retail residential mortgage applications. Purchasing increased 4.8% in the week ended Friday.The share of applications filed to refinance an existing mortgage fell to 66.4% of total applications from 69.5% the previous week.The four-week moving average for all mortgage applications was down 0.5%. Adjustable-rate mortgages made up 6.1% of activity last week, up from 5.8% a week earlier. Rates on 30-year fixed-rate mortgages averaged 4.69%, up from 4.46%, while the average for 15-year fixed-rate mortgages increased to 3.79% from 3.64%. The housing sector has been recovering fitfully, as high unemployment, elevated levels of foreclosure and tighter lending requirements continue to weigh on the market. In the latest data on the sector, the National Association of Realtors reported May pending home sale numbers had the biggest jump since November but the level is still low, historically speaking.

Risk aversion is the trend in early trading after China unexpectedly raised interest rates to combat inflation and Moody's dropped Portugal's credit rating to junk and warned of the potential need for a second bailout. S&P 500 futures are down 6.25 points at 1,330.50 while Dow futures are 44 points lower at 12,493. The Euro is 0.75% weaker vs. the U.S. dollar at 1.4312. The DAX is down 0.40%, the CAC is 0.60% worse, and the FTSE is off by 0.75%. Commodity prices are trading down too: light crude oil fell 0.82% overnight to $96.12, while gold prices dropped 0.11% to $1,511.10. U.S. Treasuries are rallying as a result and the yield curve is flattening. The benchmark 10-year note is +8/32 at 100-09+ yielding 3.089% (back inside the 2.90 to 3.10 range). The 2s/10s curve is 3bps flatter at 267bps wide. And the Fannie Mae 4.0 MBS coupon is +5/32 at 100-11. China's central bank hiked one-year lending and deposit rates by 25 basis points to 6.56% and 3.50%, respectively. This is the fifth such hike since October and unexpected move after Chinese premier Wen Jiabao declared victory over domestic inflation on June 23rd, saying that the government has successfully reined in price pressures.