MBS RECAP: Reprices for Worse Reported

It's less likely that you'll see a 2nd round of reprices from a lender who already repriced, but those still on morning rate sheets are fair game. Fannie 4.0's are down to 100-19 at the moment, and while this is only 1/32nd worse than the previous low, it comes on the heels of moderately sharp move downward shaving an eighth of a point off prices in less than an hour. Just like the last alert, we're not looking at any big-picture or long term significance behind today's weakness.

Tomorrow and Wednesday each offer only one major piece of scheduled economic data. It's a bit of a consolation that both data-sets are industry specific, beginning with tomorrow's 830am release of Housing Starts. There will be some Fed Speak from Hoenig, but it comes at 730pm, not a market moving event for tomorrow (or probably at all). Take a look at the consensus estimates and previous results for tomorrow's as well as the rest of the week's data at the following link:

(Reuters) - The Federal Reserve faces a "very high" bar for implementing another round of monetary stimulus because of the absence of a deflation threat, a top Federal Reserve official said on Monday. "The conditions we are facing now are not the conditions we faced last November when it was implemented," Dennis Lockhart, president of the Atlanta Fed, said in an interview with Fox Business Network. "At that time we were looking at the potential for deflation in the economy," he said, according to a transcript provided by the network. The Fed's second round of quantitative easing that was implemented last November, a $600 billion program of bond purchases, was completed at the end of June. Renewed weakness in the U.S. economy has sparked some speculation that the Fed could embark on a third round of quantitative easing, or QE3. But Lockhart said that recent softness was due in part to temporary factors that should dissipate as the year progresses. "I am still predicting we will have a much stronger second half and a stronger beginning to 2012. Clearly the first half of the year is disappointing," Lockhart said. He added that Congress should be careful in its efforts to rein in the budget to not cut spending too quickly and endanger an already-fragile recovery. The U.S. economy grew just 1.9 percent in the first three months of the year, and the second quarter does not appear to have fared much better. U.S. unemployment climbed in June to 9.2 percent.

Days like today seem frustrating. We haven't had any data come across that should be hurting bond markets yet MBS and Treasuries have been weakening progressively. Fannie 4.0 MBS are currently at 100-22 and 10yr yields at 2.924. That 2.924 number is an interesting and perhaps important technical level that has been providing resistance to bond market rally attempts since late May. There have been two "tests" (yields moving below the line temporarily, testing the waters, in a way), but those tests have been rejected as a lack of volume and follow-through has quickly brought yields back near or above the trendline. Those two tests were in late June and then again just this last week. In this context, it makes sense that amidst a lack of market moving data, 10yr yields have slowly drifted up from the high 2.8's this morning to seek equilibrium at the technical line as the 3pm Close approaches. In the following chart, the line in question is the second one from the bottom, and passes through exactly 2.924 today. Hugging this line means traders are staying nimble. Today's weakness isn't "bad," per se, just technicals at work. (Keep in mind this is just one technical framework in which to examine bond markets. Such pieces of technical analysis shouldn't be thought of as right or wrong, but simply, in this way: This line has been pertinent in the past and coincides well with some other technical analysis to support the same general themes of being "stuck." Most specifically, it's the diagonal counterpart to the horizontal 2.90 level).

(Reuters) - President Barack Obama would veto the Republicans' "cut, cap and balance" plan on federal spending if it wins congressional approval and comes to his desk, the White House said on Monday. "The bill would undercut the federal government's ability to meet its core commitments to seniors, middle-class families and the most vulnerable, while reducing our ability to invest in our future," the White House said in a statement. A vote is expected in the House of Representatives this week on the Republican plan, which would condition an increase in the debt limit on passage of a constitutional amendment to require the federal government to balance its books each year. Even if approved by the Republican-led House, the bill's chances of passage in the Democratic-controlled Senate are doubtful.

It's possible that we'll get another volatile bounce back up, thus negating this risk of reprices for the worse before lenders act on it, but with MBS now 2/32nds lower than their previous lows of the day, and 10yr notes almost 2bps higher than their high yields of the day, we're seeing trends that are a bit worse than the previous ones that could have been chalked up to volatility. Risks of reprices for the worse now clearly trump previous chances of reprices for the better. All that said, current moves aren't indicative of any long-term shifts and don't necessarily indicate how the rest of the week will go. Data and volume are much more limited than they were last week.

MBS had been on the up and up until just after the 10am hour. Now the reprice outlook, which we'd previously noted as positive, is at least back to neutral. Fannie 4.0's are 3/32nds lower than that last update, currently at 100-27, roughly in the middle of their range this morning. In addition to simply being "off the highs" of the day, things have been slightly more volatile than normal. The choppiness in the charts is going to make it tough to pin down objective reprice targets as the validity of any target is only as good as the stability of trading leading up to it. In other words, MBS could move from these middle-of-the-road levels directly to the highs or lows of the day and we might not see any reprices unless the market calms down a bit and gives the indication that those recently reached levels are something other than just another passing chunk of volatility. Naturally though, "big scary moves down," are more likely to create negative reprice risk than "big exciting moves up."