MBS RECAP: 8/12/2011

Unlike some dataless Monday's, next week kicks off with a decent line-up of scheduled reports, including Empire State Manufacturing Survey, Treasury International Capital (so the talking heads can talk about how much of the US is "owned by China"), and the Housing Market Index. Those hit the wires at 830am, 9am, and 10am respectively. Fed's Lockhart speaks at 1:25pm, and that will be it for Monday. The rest of the week keeps right on going with a packed schedule of economic data, and Friday falls silent with only one Fed-Speaker, Pianalto.

If you had to pick one horizontal line in the S&P Index over the past 3 years as being the dividing line between the financial crisis and everything else, it would be very close to 1188 (although the 1217 to 1230 is another good candidate). Over the past two days, S&P's been close on several occasions but failed to break higher than 1188. Bond markets seem to be aware of it too. The first time stocks got close, 10's retested their worst levels of the day yesterdays. Then today, each run at 1188 coincided with weak point for 10's. The less serious the threat of a stock market breakout higher seems, the less weakness we see in bond markets. Now at 1178.19 with 50 minutes left to trade, stocks look like they're packing up their shine box and headin' home. Treasuries and MBS are near their best levels of the day. For 10yr notes, that's almost 10bps lower on the day at 2.2407. Fannie 4.0's are 19 ticks up on the day at 104-12 and 3.5's are up 22 ticks at 101-06. If any remaining lenders have the capacity to reprice for the better, this is about the friendliest the market has looked all day to do so. In other words, if any other lender is willing/able to reprice for the better today, markets are good enough to justify it--not necessarily because new gains have been made, but moreso due to the incredible absence of volatility versus the rest of the week. Then again, reprices for the worse are a lingering possibility depending on pipeline control needs, though such reprices have certainly died down today.

(Reuters) - Fund investors pulled out of both stocks and bonds and plowed cash into money markets and precious metals in the week ended Aug. 10 as concerns about the global economy grew, data from EPFR Global showed on Friday. Money market funds pulled in a net $49.8 billion, according to the Boston-based fund tracking company. "Overall, equity funds posted collective outflows of $26.1 billion, their worst showing since late second quarter 2008, while a record setting $10.4 billion flowed out of bond funds," EPFR said in a statement. (Full Article:)

While we may not be officially in another recession, we're not above reusing headline verbiage when appropriate. Resource conservation... All kidding aside, there is a case for technical support at 104-03 in Fannie 4.0's, and that goes back to Tuesday, when it first came into play as a ceiling, the a floor on the 10th, and again for most of the day yesterday, finally breaking in the late afternoon. But prices moved back over this technical line before hitting the resistance mentioned in the last update at 104-14. With the recent bounce at 104-03, the afternoon game of ping-pong is set. Maybe we'll get a decisive winner or maybe things will be calm enough that neither boundary is tested. Either way, a move toward the upper line could be a reprice for the better indication (although, given current prices and the timing of morning rates, we could even see reprices simply holding current levels. It's been long enough, and markets look supportive enough). And a break below 104-03 could be "reprice for the worse" material, all thing being equal. But as you know, all things are not equal and we're still in an "amber alert" of sorts as far as possible impromptu reprices for the worse are concerned (pipeline control). We think that will be less and less of an issue going forward, but wouldn't rule it out as a frustrating possibility just yet. By the way, there's some lovely technical developments in stocks too, as the S&P just bounced off 1188 which was also the morning high.

104-14... That's the price level in Fannie 4.0's that capped us off yesterday after MBS fell through it in the morning. It's been nice to see the rally this morning, and indeed we're 17 ticks up on the day right now, but we just got a fairly solid bounce lower off 104-14, and currently sit at 104-10. 10yr yields backed up quickly from 2.23 to 2.26 over the same time. But there's no sign of full-blow sell-off. Bond markets seem to be responding unfavorably to the threat of stock market gains. The best levels of the day for bond markets coincided with stock prices bouncing for a 2nd time at their lows of the day (to be clear, the levels weren't exactly the same, but the two prominent dips in the S&P occurred at 1171 and 1173. The stock lever looks well-connected and given that we're heading into a Friday afternoon of an exhausting week, with no further economic data on tap, we may well be looking to stocks for guidance. Fortunately, they're not looking like they want to stage a runaway rally just yet, but the day is young, liquidity will wane, volatility may pick up as a result, so there are no guarantees that current "calmness" will be maintained.