MBS MID-DAY: Stock Lever Engaged?

A couple important things to note... We're now seeing a bit of disconnection between Treasury yields and stock prices. 10yr yields just pushed to their weakest levels of the day at 2.132 (but have come back in a bit) without a similar move from stocks. It's possible we'll continue to see a stock lever disconnect this week as money is sidelined in preparation for Jackson Hole. It's also possible that TSY yields might march to the beat of their own drum Tues-Thurs to position for the 1pm auctions on those days. The other important thing to note is that the trend so far this morning in 10yr yields has been one of higher highs and higher lows, despite the recent pull back from 2.132. Combine that with highs and lows from Thursday and it looks like there's a risk that we're doing something other than moving sideways, but if we're able to break past the mid 3.11's for any length of time this morning, that would go a long way towards removing that risk.

PMI Mortgage Insurance Co. (“PMI”) and PMI Mortgage Assurance Co. (“PMAC”) have been informed that they must cease writing new commitments for insurance effective as of the close of business on August 19, 2011. PMI and PMAC may issue mortgage insurance policies under pending commitments through the close of business on September 16, 2011. While PMI and PMAC are no longer able to continue to write new insurance, we will support our customers’ ongoing policy servicing needs and loss mitigation programs. PMI will maintain all systems, processes, and contact points for policy servicing, loss mitigation, and claims operations just as we do today. Please continue to use the same contact numbers for your sales and operational representatives at PMI. As we are only authorized to issue new commitments until the close of business today, investor acceptance and deadlines will likely differ from our regulatory approval. We expect the GSEs to communicate mandatory delivery dates of PMI or PMAC issued certificates shortly. We encourage customers to review investor delivery requirements directly with them.

After opening at 1145, the S&P index is down into the high 1130's now, a fact that has coincided with 10yr Notes seemingly able to hold their ground at 2.12+. 10's definitely feel like they're under pressure, but as long as they've held within the worst levels of the morning, MBS have stayed relatively strong. Fannie 4.0's are down only 3 ticks on the day now at 104-04 and have continued to operate in the sort of tight range that tends to be good for lenders passing along as much as they're willing from MBS prices to rate sheets. Lenders are starting to come out with rate sheets roughly in line with Friday's offerings despite the red on the screens. Just a reminder: no scheduled economic data today (Chicago Fed National Activity index was out this AM, but no one blinked) so movements in the stock market and news headlines are two of the best candidates we have for market movers today.

Markets are clearly treating 12 Noon as the unofficial "close" last week. Case in point: stocks had been consolidating into prices just over 1140 in the S&P after having hit 1132 both on Thursday night and Friday morning. The rise into the 1140's was the first sign of a correction off those recent lows in equities. Adding credence to this way of looking at things would be the fact that volume characteristically dropped off into Friday's PM hours. The most convincing argument would be a quick glance at volume and levels this AM. Stocks are back over 1140, volume is higher, and thus the week begins. With stocks bouncing off recent lows, so too are Treasury yields. While we did see 10yr yields crack the 2% barrier on an intraday basis, by FAR AND AWAY, the prevailing resistance has been at 2.06+. The fact that this was also the daily closing low from 2008 (not to mention that it's the lowest closing yield as far back as we have records) reinforces its technical significance. Normally, we might wonder if we should be "scared" that Treasuries look like they'll have a hard time improving from here, but do we really want 10yr yields under 2%? From what we just witnessed, that hasn't been so good for MBS, who have been simply incapable of keeping pace into such rallies. With that in mind, it's comforting that 10yr yields are flagging into recent highs at 2.12, in line with Friday's weakest levels. MBS seem pleased by all this, outperforming Treasuries, although still down a few ticks this morning. Fannie 4.0's are down 4 ticks at 104-03 and 3.5's are down 9 ticks at 101-06. Lower MBS prices almost always indicate weaker rate sheet offerings, and that's certainly a possibility this morning, but if things hold as stead as they have been so far (4.0's in a 3 tick range), things might not be so bad. This depends, however, on 10yr yields holding onto their supportive containment of overnight losses (objectively, that probably means staying under 2.13).

(Reuters) - Libyan government tanks and snipers put up scattered, last-ditch resistance in Tripoli on Monday after rebels swept into the heart of the capital, cheered on by crowds hailing the end of Muammar Gaddafi's 42 years in power. Even as they battle Muammar Gaddafi's last strongholds in Tripoli, Libyan rebel leaders must race to impose order and prevent bloody score-settling as the capital shakes off 42 years of despotism, analysts and Western officials say.

Efforts to reach a settlement that would end the long-running probe of foreclosure practices are snagged over whether banks will get broad legal immunity from state officials for mortgage-related claims. Federal and state officials are seeking penalties of $20 billion to $25 billion from Bank of America Corp., J.P. Morgan Chase & Co. and other financial firms under investigation since last fall. The banks are pushing hard for a deal, but they have insisted on a wide-ranging legal release from state attorneys general. "They wanted to be released from everything, including original sin," said a U.S. official involved in the discussions. The legal protection sought by the banks included loan origination; securitization and servicing practices; fair-lending procedures; and their use of the Mortgage Electronic Registration Systems, an industry-owned loan registry that often acts as an agent for owners of mortgage loans, people familiar with the discussions said. "The reason the banks would settle or pay anywhere near $20 billion to $25 billion is to get this behind them," said one person familiar with the banks' thinking. "There's no reason the banks would pay that amount of money and leave their flank exposed." (From THE WALL STREET JOURNAL) By Ruth Simon, Vanessa O'Connell and Nick Timiraos (more...):

A selection of market commentary on Federal Reserve Chairman Ben Bernanke’s remarks Friday at the Kansas City Federal Reserve Bank’s annual Jackson Hole, Wyo., symposium, the forum where last year he set the stage for the second round of quantitative easing: “The Fed chairman… will likely expand upon the additional easing options available (with either another round of asset purchases or, less dramatically, changing the composition of existing assets to boost average duration at the top of the list), while also highlighting some of the arguments against further easing yet. We are not forecasting more easing, but would likely change our call if growth prospects deteriorate further or Mr. Bernanke sends a strong signal.” - Jim O’Sullivan, MF Global “Much like last year, we expect news out of Jackson Hole will be more about getting a feel for the Fed’s opinion on its easing options, and less about the Fed actually choosing an option. While the odds of additional easing have certainly increased in recent weeks, we do not expect the Chairman will single out any specific option or signal additional easing is imminent.….We think the FOMC clearly needs more justification than sliding equities to engage in additional easing, but if the consumer retrenching we expect becomes even modestly more pronounced, the Fed would have its cover. In the case the Fed implements additional measures, we expect QE3 would come in the form of a maturity extension – the costs of alternatives, namely lowering IOER and inflation targeting, are too high.” – Tom Porcelli, RBC Capital Markets