MBS RECAP: Flight to Safety

The converging trends in bond markets were broken today in our favor. Although the trend in question was slightly directional, it's just as well to call it 2.25 heading into tomorrow. That's the horizontal level that will need to hold up in order to confirm a shift from "sideways" to "improving." The stock market and technical day trading will provide plenty of guidance to pick up slack from a relatively light economic data calendar. The only item of note is the Producer Price Index at 830am. This used to be much more of a market mover than it has been recently, but neither would we disregard it. As usual, the bigger the deviation from the consensus, the more the movement potential. Richard Fisher is the lone Fed-Speaker of the day at 120pm, but we'd classify Fed-Speak as perhaps slightly more important than normal both because it follows a recent FOMC-catalyzed market shake up and because it precedes next week's Jackson Hole Fed-stravaganza. The following link has further details on tomorrow's events as well as the rest of the week.

Bond markets moderated following their initial rally today but have again marched back toward their best levels of the day after stocks failed to break back into positive territory. This time around, MBS are tightening up to Treasuries and are truely at their best levels of the day while 10yr notes are merely "close." For Fannie 4.0's, that's just over 3/8ths of a point on the day at 104-12 and 10yr notes are 9.4 bps better on the day at 2.216. The twofold impact of MBS being at their highs and also having held onto gains without correcting too much lower (only hit 104-07) is positive for the reprice outlook. Several lenders have already repriced for the better, and more may follow if these levels are maintained.

(Reuters) - The leaders of France and Germany met for high-pressure talks on Tuesday to discuss what further measures they can take to shore up investor confidence in the euro zone following a dramatic market sell-off last week. Following (in the link) are key quotes from a joint news conference held by President Nicolas Sarkozy and German Chancellor Angela Merkel.

10yr yields are currently LOWER, and testing a breakout of the triangle we've been eyeing for the past few days. This would be good technical indication, and increasingly so the longer it continues to be true. Now this seems like a pretty timid way to refer to current gains, which are pretty nice versus earlier trading (10's down to 2.22, Fannie 4.0's up to 104-09), but in the context of august, it is a pretty timid breakout. Even if the breakout of the triangle can be confirmed, all that does is give the nod to the slight trend of improvement from the lows of 8/9/11. That puts support around 2.30 today and doesn't guarantee a sustained move lower without first testing horizontal resistance. 2.22+ is clearly the first wall to get through, and indeed we're there already. Next major horizontal tech is near 2.17 give or take a bp. After that, 2.09/2.10 is going to be the biggest challenge. But we'll cross the bridge of discussing forward looking techs when we get closer. For now, all we know is that the 2.22 level is looking like it is providing resistance right now as 10's continue to dance around it. MBS turned the corner at yesterday's highs in response, but remain high enough to justify reprices for the better.

Although the gains are on the mild side, stocks have generally been moving up today. e.g. S&P lows near 1187 and highs recently at 1198. Please note that 1187/188 area in S&P's. It's super scary. Why scary? Because it's clearly a horizontal line in the sand for stocks. Although it goes back much further into the past, it most recently acted as FIRM resistance to stock gains on the 11th and 12th. Then yesterday, stocks opened higher and fell towards 1188, this time relying on it as a supportive floor. Now that trend continues today as the lows are effectively a reinforcement of the 1188 technical. Why all the stock talk on the MBS site? Because bonds are definitely paying attention to stocks these days, and because the recent epic moves in both markets certainly rely on each other as making statements about big, long-term shifts. But so far, MBS and TSYs are calling the bluff of the 1188 support, themselves holding fairly steady and with similar gains as earlier this morning. 10's are 4 bps better on the day at 2.27 and Fannie 4.0's are up 5 ticks on the day at 104-04. We could see reprices for the better if MBS continue to hold these levels as steadily as they have been or if they improve from here. Those potentialities may depend on the impending news conference after "Merkozy" (meeting between Sarkozy and Merkel) set for Noon Eastern.