MBS MID-DAY: Shaky

MBS just moved to their lowest levels of the day, though we'd definitely be reluctant to chalk that up to Home Sales. That economic data had its chance to move markets and failed. There are a few other things going on behind the scenes that may be contributing, such as the unwinding of a small portion of the "flight to safety" trades associated with overall EU Panic. Remember, we're in a sub-3% 10yr Treasury kind of market in part due to those EU-related concerns. So when large or small snippets of news come out that ease small or large parts of that concern, bonds will weaken. We're not sure to what extent the following news is moving things weaker, but there is a rumor that a Washington consultant put out a report calling for a comprehensive Greek bailout package. In addition, the ECB's Smaghi says that the European Finanacial Stability Facility should be given more flexibility to buy back bonds and that restructuring Greece's debt would be a bad idea, implying more assistance might be coming Greece's way than previously thought. Those words echo earlier comments by ECB's stark that Greece can get out of their mess without exiting the EU. Fannie 4.0's are down 8 ticks on the day now to 100-21 and if a lender released rates more than 20 minutes ago, they may already be considering a reprice for the worse.

10yr Treasury yields have risen a little less than 0.01% in yield and Fannie Mae 4.0 MBS have fallen about 1/32nd in price following the release of June's Existing Home Sales data. The data showed the annual rate of existing home sales to have fallen 0.8 pct versus economist forecasts for a gain of 2.9 pct. Despite the weaker than expected headline figure, markets may have found this slight strength in the 0.8 pct increase in median prices, or the fact that almost a third of reported sales were distressed properties (no major change from last report). But the market movement was so small that it could be chalked up to a "random walk" just as easily as it could be attributed to the economic data. Shrug shoulders. Move on. Nothing to see here. In fact, even in the course of writing this update, yields have already moderated back toward 10am levels and MBS have gained back the one tick lost. That puts 4.0's at 100-25+, which is 4/32nds (or .125 ) down on the day.

(Reuters) - Sales of previously owned U.S. homes unexpectedly fell in June to touch a seven-month low as cancellations of pending contracts surged, an industry group said on Wednesday. The National Association of Realtors said sales fell 0.8 percent month over month to an annual rate of 4.77 million units, the lowest since November. May's sales were unrevised at a 4.81 million-unit rate. Economists polled by Reuters had expected sales to rise 2.9 percent to a 4.90 million-unit pace. In the 12 months to June, sales dropped 8.8 percent. (Reporting by Lucia Mutikani; Editing by James Dalgleish)

Nothing too exciting since the end of MBS trading yesterday. A slight increase in the general level of risk tolerance gave overseas equities a bit of a boost and moderated some of the strength seen late yesterday in bond markets. MBS are outperforming Treasuries though. That's easily seen in a Fannie 4.0 coupon down only 2/32nds vs a 10yr note down 8 ticks. (Granted, that's price vs. price, whereas yield vs yield MBS are tighter maybe 2-3 bps). That outperformance is a logical and expected turn of events given how badly MBS have gotten whooped by TSY's recently (in other words, recent underperformance has made for attractive, wide spreads). Additionally, MBS tend to close the distance to Treasuries a bit into price losses. At 100-27, MBS are only 2 ticks off yesterday's best levels. 10 yr notes are at 2.9075, fairly close to the mid-point of their recent range-bind. Only scheduled econ data this morning will be Existing Home Sales coming up at 10am.

(Reuters) - Applications for U.S. home mortgages surged last week, racking up the biggest increase in four months on a flood of refinancing demand as interest rates remained low, an industry group said on Wednesday. The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, spiked up 15.5 percent in the week ended July 15. It was the largest increase since early March. "Ongoing turmoil in the financial markets primarily due to the sovereign debt crisis in Europe has brought mortgage rates back to their lowest levels of the year," Michael Fratantoni, MBA's vice president of research and economics, said in a statement. "Refinance applications have surged in response." The MBA's seasonally adjusted index of refinancing applications soared 23.1 percent, but the gauge of loan requests for home purchases dipped 0.1 percent. The refinance share of mortgage activity rose to 70.1 percent of total applications from 65.6 percent the week before. Fixed 30-year mortgage rates averaged 4.54 percent, easing from 4.55 percent. (Reporting by Leah Schnurr; Editing by Diane Craft)