MBS RECAP: Through the Roof

Tomorrow is a busiest day of the week so far in terms of scheduled economic data. As per usual Wednesday's, things kick off early with 7am MBA Applications. ADP Private Payrolls reports at 815am, like it or not, a potential market mover. There's no 830am data tomorrow, but Treasury will announce it's quarterly refunding announcement. This is a bit different than the regular old auction announcements that happen more frequently and thus may get a little more attention to any deviations from previously expected amounts. The econ data picks back up at 10am with Factory Orders and ISM Non-Manufacturing. That ISM isn't normally quite the mover that the Manufacturing Index is, but not insignificant either. For more details on the rest of the week's economic events, as well as consensus estimates and previous readings, see MND's "Week Ahead" here:

Reuters) - European Council President Herman Van Rompuy may get an enlarged role as coordinator and spokesman for the euro in an effort to impose greater policy discipline in the single currency area, EU sources say. A senior French official said: "We are examining governance in the euro zone in the context of the proposals the president wants to make with Chancellor (Angela) Merkel. There are several options on the table. We'll know more at the end of August." Two senior EU sources said a central issue was trying to put an end to the cacophony among multiple policymakers which has undermined markets' confidence in Europe's ability to surmount its sovereign debt crisis over the last 18 months. "There has to be one voice," said a senior official involved in preparing the monthly meetings of the Eurogroup finance ministers of the currency zone. Another senior EU official said the Commission was working on ideas about "how we can enhance verbal discipline in the Eurogroup". The European Central Bank has enforced much greater discipline in conveying its policy message to markets, but it exercises greater power over national central bankers than Brussels has over member governments. Van Rompuy chairs all summits of the 27-nation EU under the Lisbon Treaty that came into force in late 2009. He has no official role in the euro zone but he did chair two emergency summits of euro zone leaders this year. LEADERSHIP VACUUM Many EU officials say the crisis has been exacerbated by a leadership vacuum, partly due to the lacklustre performance of Eurogroup chairman Jean-Claude Juncker, the veteran Luxembourg prime minister who has been an EU deal-broker for two decades. "The Eurogroup is dysfunctional," said the senior official. "There's a personality issue. Juncker is clearly tired and fed up. He's really exhausted," the official said. "He goes to meetings without preparing. He doesn't direct and doesn't conclude the discussions. It's messy."

Let's be clear: it's not the completion of the senate vote that is bringing bond markets to their best levels of the day/year. It's just the prominent news item of the afternoon. Yeah, so... that passed. Moving on.... 10yr notes have touched their long term trendline several times in recent minutes (it's moving through 2.638 today), and 10's are up a full point in price (11 ticks in yield). The yield curve is at a technical level as well: 231.2 bps. That all suggests there's a chance we'll see resistance to further gains over the next 1.5 hours, but if stocks are able to break lower than the mid 1260's in S&P's, bonds might follow. MBS continue to lag Treasuries, but continue to follow the directional moves. Fannie 4.0's are up 20 ticks on the day (.625) to 102-17. Reprices for the better are increasingly likely now.

(Reuters) - PIMCO's Bill Gross is underwhelmed by the deal hammered out in Washington to cut government spending and raise the borrowing capacity of the United States, saying it does not make a "significant dent" in the deficit. In his monthly investment outlook newsletter, Gross, who runs the world's largest bond fund, said: "Even though the U.S. has managed to avert a debt crisis and perhaps a ratings downgrade, there remains a stain on our reputation, a scarlet 'A' for budgetary 'Abuse,' that will not disappear." Gross, whose $243 billion Total Return Fund (PTTRX.O) held 8 percent in U.S. Treasuries and Treasury-related securities at the end of June, said much more deficit reduction is required. He added that "the fun times are over," even as signs of relief over a deal being reached are "heard across the global financial markets." The deficit-cutting deal passed by the House of Representatives on Monday evening will likely clear the Senate in a vote on Tuesday, just hours before the Treasury's authority to borrow funds runs out. If approved by the Senate in a noon EDT (1600 GMT) vote, President Barack Obama would sign the bill into law shortly afterward. "Nothing in the congressional compromise reached over the weekend makes a significant dent in our $1.5 trillion deficit," Gross wrote in his widely followed newsletter, published on the Newport Beach, California-based firm's website. "Trillions of further spending cuts, and yes trillions of tax hikes, are necessary to stabilize our "official" debt/GDP ratio of 90 percent or so," Gross said.

Stock prices and bond yields are at their lowest levels of the day. For 10yr notes, that's 2.674. S&P's are bouncing along something in the low 1270's. If you were to zoom out and look at a long term S&P chart, this is exactly on a supermassive inflection point that acted as resistance in late 2010 and has been supportive throughout 2011. MBS are merely along for the ride, trying to keep pace with Treasuries as best they can, and doing a mostly OK job of it. Fannie 4.0's are up 15 ticks on the day at 102-12, highest prices of the year. Reprices for the better are possible, but with varying degrees of probability ranging from low to medium.