MBS RECAP: Market Mover on Horizon

We noted earlier today that bond markets, as benchmarked in this example by 10yr yields, are right in the middle of their recent range beginning in last few sessions of June. That makes for an interesting day tomorrow as the always-important Employment Situation Report (hereinafter: NFP) is going to need to move markets rather convincingly to get 10yr yields out of that range. The risk we're implying is that tomorrow might not leave us with as much guidance as it could if it coincided with a high-volume breakout of the range. As always, NFP will be released at 830am, and we're fairly confident that will be the highlight of the day, but will also note the Wholesale Trade report at 10am and Consumer Credit at 300pm. It is possible that NFP could get markets moving in one direction and the 10am data could accelerate or counteract that directionality to a small but not insignificant extent. That possibility is much less likely with data as late as the 3pm Consumer Credit.

(NY TIMES) - As millions of Americans struggle in foreclosure with little hope of relief, big banks are going to borrowers who are not even in default and cutting their debt or easing the mortgage terms, sometimes with no questions asked. Two of the nation’s biggest lenders, JPMorgan Chase and Bank of America, are quietly modifying loans for tens of thousands of borrowers who have not asked for help but whom the banks deem to be at special risk. Rula Giosmas is one of the beneficiaries. Last year she received a letter from Chase saying it was cutting in half the amount she owed on her condominium. Ms. Giosmas, who lives in Miami, was not in default on her $300,000 loan. She did not understand why she would receive this gift — although she wasted no time in taking it. Being underwater, as it is called, can prevent these owners from moving and taking new jobs, and places the households at greater risk of foreclosure. While many homeowners desperately need help to keep their homes and cannot get it, the borrowers getting unsolicited relief from Chase sometimes suspect a trick. Cutting loan balances, even for loans in default, is supposedly so rare that Federal Reserve economists wrote in a paper in March that “we could find no evidence that any lender was actually reducing principal” on mortgages. Dan B. Frahm, a spokesman for Bank of America, said it was using every technique short of principal reduction to remake its loans, including waiving prepayment penalties, refinancing, lowering the interest rate, postponing some of the balance and extending the term. “By proactively contacting pay option ARM customers and discussing other products with better options for long-term, affordable payments, we hope to prevent customers from reaching a point where they struggle to make their payments,” Mr. Frahm said.

(Bloomberg) -- Wells Fargo & Co. agreed to pay $125 million to settle accusations by investors that the bank misled them about the risks of mortgage-backed securities it sold. The plaintiffs in the consolidated group case, or class action, include the General Retirement System of Detroit, New Orleans Employees’ Retirement System and other public pensions, according to the settlement filed yesterday in federal court in San Jose, California. Wells Fargo, the largest U.S. home lender, and several investment banks that underwrote the securities were sued in 2009 over alleged violations of securities laws in connection with sales of mortgage pass-through certificates. The bank and the underwriters deny wrongdoing, according to the court filing. David Stickney, an attorney for the investors, and Richele Messick, a spokeswoman for San Francisco-based Wells Fargo, didn’t immediately return voice mail messages seeking comment. The case is In Re Wells Fargo Mortgage-Backed Certificates Litigation, 09-1376, U.S. District Court, Northern District of California (San Jose).

(Here's the live update that was in the works as recent MBS movements necessitated an alert. With benchmark 10's holding their range and MBS potentially ready to do the same, it's still 100% applicable.) As the day winds down and as thoughts turn toward tomorrow's Jobs report, volume and volatility are dwindling. MBS and Treasuries are moving in increasingly narrow ranges, giving charts that characteristic sideways vibe often seen heading into an NFP. Today's version of that is actually only part of a larger version that began with the insane volume spikes in late June and early July. Depending on the charting interval, the limits of this current range are 3.08 and 3.22. Although even we have referred to those as 3.10 and 3.20. Don't get too caught up in the specifics of describing those levels. We're talking about a big big picture here and these are just general lines in the sand that describe this newer, higher yield range that marks the the territory to which bonds have been pushed following the bounce of 2.85% 10yr yields. In other words, markets are always moving up, down, or sideways. Yields HAD been trending DOWN (stronger) since 4/11. They then bounced at 2.85 and had been trending up (weaker and/or lower MBS prices) as we entered July. And since then, we're SIDEWAYS, ostensibly in wait-and-see mode ahead of NFP. We note all of this, NOT to make any statement about the short term movements, but rather to draw your attention to what's playing out in the bigger picture, and that this afternoon's trading makes good sense within that context.

After making it back to the best levels of the post ADP report range, MBS have quickly moved back to the worst levels. In terms of 4.0 Fannie coupons, that's 11/32nds down on the day at 99-25. Any time we see MBS move from the high end to the low end of the day's dominant range, we're sensitive to the possibility of reprices for the worse. However, we'd also point out that 10yr benchmarks are NOT experiencing a similar move to test their weakest levels, and so from a technical standpoint, things aren't perhaps as dire as MBS would suggest. That means we might see 4.0's snap back fairly quickly here (as long as 10's keep their range-bound status) making the risks of reprices for the worse minimal. Whatever the case, the previous alert status was positive, and we can at least say that should no longer be the case.

(Reuters) - The European Central Bank raised interest rates for the second time in three months on Thursday and signalled a further hike is likely this year to tackle inflation despite the intensifying euro zone debt crisis. Euro zone inflation held at 2.7 percent in June, well above the ECB's target of just under 2 percent and Trichet said the bank's interest rates remained accommodative even after Thursday's increase. The rise in the ECB's benchmark interest rate to 1.5 percent was widely expected after the bank's recent reiterations that it was in "strong vigilance" mode -- code traditionally used to signal a hike. The ECB also offered help to hard-pressed Portugal after ratings agency Moody's downgraded its debt to junk status this week, pledging to keep providing it with liquidity regardless of ratings. On Greece's debt troubles, President Jean-Claude Trichet stuck to the bank's view that any rescue should not trigger a default or a payout in credit insurance, a stance that pushes the problem back to governments. "We will continue to monitor very closely all developments with respect to upside risks to price stability," Trichet told a news conference after the bank raised interest rates by 25 basis points to 1.5 percent -- its second rise this year.

Fannie Mae 4.0's continue to operate in well below their pre-ADP levels, but are moderately higher than the weakest levels of the day. The ADP Data took 4.0's down to 99-24+, and 99-30 is as high as they've made it since then. But with current prices at 99-28, it has been enough for at least one of our traditionally quick-to-act lenders to issue an eighth better in rebate. It's possible we could see more reprices, but would need some better gains to get a majority of lenders involved. Technical analysis suggests a somewhat depressing read of 10yr yields with 3.14 having been the weakest level before ADP and the best level since. This "pivot point" is a good one to watch as an early indicator of any potential shift in momentum. A break below could pave the way for better gains in MBS.

(WASHINGTON POST) - President Obama made a rare admission of a policy misstep Wednesday, acknowledging that his administration failed to provide enough support to struggling homeowners and recognize the scope of the nation’s housing crisis. Despite predictions by Obama’s advisers that the housing market would rebound by now, real estate prices are falling once again. And the administration’s efforts to push banks to modify the mortgages of families who missed their monthly payments have been widely criticized as lacking. Obama first raised the issue Wednesday when a questioner during a town hall event asked what mistakes the president had made in handling the economy. “The continuing decline in the housing market is something that hasn’t bottomed out as quickly as we expected,” Obama responded. Later, he added, that his administration’s efforts to help struggling homeowners were “not enough.” ....“And so we’re going back to the drawing board,” he said. The housing issue threatens to loom over Obama’s reelection campaign, with foreclosures piling up and real estate markets in turmoil in pivotal swing states such as Florida and Nevada, which voted for him in 2008. One person asked in a tweet: “How will admin work to help underwater homeowners who aren’t behind in payments but are trapped in homes they can’t sell?” Obama responded that “given the size of the housing market, no federal program is going to be able to solve the housing problem.” He later added: “Some folks just bought more home than they could afford and probably they’re going to be better off renting.” Obama also said his administration would press banks to modify loans more quickly and, where possible, reduce the principal owed by homeowners.

Treasury just posted the terms of next week's 3-yr, 10-yr and 30-yr debt auctions. In total Treasury will offer $66bn in new coupons. The package consists of $32bn 3s to be sold on Tuesday, $21bn re-opened 10s on Wednesday and $13bn re-opened 30s on Thursday. All of these amounts are unchanged from previous auctions.

(WSJ) - Apartment landlords are enjoying rising rents and falling vacancies. The average effective rent, the amount paid after discounting, was $997 in the second quarter of the year, up from $974 a year earlier, according to a report scheduled for release Thursday by Reis Inc., which tracks leasing data for 82 markets. Second-quarter rents rose in all but two markets. Vacancies, meanwhile, fell in 72 of the 82 markets during the second-quarter vacancy rate to 6%, the lowest since 2008 and compared with 7.8% a year earlier, according to Reis. "Rising rents and falling vacancies are the perfect situation for landlords," said Rich Anderson, an analyst for BMO Capital Markets. But there were some cautious signs in the data. Landlords filled a net 33,000 units in the second quarter, a slowdown from the 45,000 units they filled in the first quarter. That was somewhat surprising because typically, the net "absorption" rate falls faster during the summer as college graduates leave campus and descend on cities in search of jobs. Some analysts said the slower absorption rate could be linked to slower job growth, although it is too soon to know for sure. The peak apartment renting season runs from May to September. Meanwhile, supply remains constrained. Roughly 8,700 new apartment units opened during the second quarter, the second-lowest quarterly tally for new completions since Reis began collecting data in 1999. But there is new construction in the pipeline. The CoStar Group, a Washington, D.C.-based real-estate research firm, expects about 22,500 units to be added this year, followed by 94,600 in 2012 and more than 109,000 in 2013. But as long as employers keep adding jobs to the economy, analysts say, they expect vacancy rates to keep falling and rents to keep rising. "Vacancies should continue to decline while rents rise at an even faster pace than we observed in the first half of the year", Reis wrote in the report.