MBS MID-DAY: Rates Follow Stocks Higher

(Reuters) - Some of the downgrades were the biggest seen in a Reuters bond poll, after a month of poor economic data rekindled expectations -- albeit slim -- that the U.S. and UK central banks could again try quantitative easing to boost growth. The poll of more than 40 economists and fixed income strategists was the first since Standard & Poor's removed its top-notch "AAA" credit rating for the U.S. government, which had sparked talk that yields could rise markedly. Instead, dozens of basis points were lopped off the median outlook for U.S., euro zone, UK, Japanese, Canadian and Australian two- and 10-year bond yields over the 12 months. All 29 common contributors from this poll and the July survey downgraded their forecasts for the 3-month USD LIBOR LIBOR, 2-year and 10-year U.S. T-notes for almost all time horizons. Analysts more than halved their yield forecasts for the 2-year T-note. From 0.21 percent on Wednesday, analysts see it yielding 0.3 percent in three months, 0.4 percent in six months and 0.6 percent in a year's time (compared with 0.7, 0.9 and 1.5 percent in the July poll). The 10-year T-note, which on Wednesday yielded 2.14 percent, is expected to yield just 2.5 percent in three months some 80 basis points less than the 3.3 percent in July's poll. Analysts then see it rising to 2.8 percent in six months (vs 3.5 percent in July's poll) and 3.1 percent in 12 months (vs 3.8 percent). For the three-month time horizon, a majority (33 of 42 economists) now expect the yields to fall to or below 2.7 percent, which was the lowest forecast last month. Analysts will be looking to Friday's annual speech from Fed Chairman Ben Bernanke in Wyoming's Jackson Hole, in which last year he suggested the Fed could help growth by buying long-term bonds. No similar announcement is expected this time.

(Reuters) - Moody's Investors Service cut its rating on Japan's government debt by one notch to Aa3 on Wednesday, blaming a build-up of debt since the 2009 global recession and revolving-door political leadership that has hampered effective economic strategies. Japan is preparing to elect its sixth leader in five years to replace unpopular Prime Minister Naoto Kan, under fire for his handling of the response to a March tsunami and subsequent radiation crisis at a crippled nuclear power plant. The downgrade, while not out of the blue, served as another reminder of the debt burdens that nearly all of the world's major advanced economies shoulder, even as policymakers struggle to agree on ways to stimulate sub-par growth without massive new spending. The United States lost its top-tier AAA rating from Standard & Poor's earlier this month, and Moody's warned in June that it may downgrade Italy as Europe's sovereign debt crisis festers. Moody's new rating on Japan's debt is three notches below coveted AAA status, which Tokyo lost in 1998, but is still classified as high grade. Japan is now the same level as China, which surpassed it last year to become the world's second-largest economy, and one notch below Italy and Spain. "Over the past five years, frequent changes in (Japan's) administrations have prevented the government from implementing long-term economic and fiscal strategies into effective and durable policies," Moody's said. Moody's had warned in May that it might downgrade Japan's Aa2 rating due to heightened concerns about faltering growth prospects and a weak policy response to rein in bulging public debt, already twice the size of its $5 trillion economy.

If you already had rates this morning, you're now at risk of a reprice for the worse. If not, we're probably looking at a delay in initial sheets at MBS fell to new lows after stocks broke yesterday's highs. This coincided with a technical break of the 2.17 level in 10yr notes which was accompanied by a minor uptick in volume. 10's are currently at 2.195 although there's room to hit 2.20 and slightly higher today without breaking out of the trend channel which has governed 10yr yields since 8/18. Fannie 4.0's are down 5 ticks on the day now at 103-19. 3.5's are down 5 ticks at 100-22.

Fannie Mae 30yr Fixed 4.0 MBS coupons made it as low as 103-20 following a better-than-expected print of the Durable Goods report. Things have been a little choppy since hitting those lows, but we're back in the green, up a tick on day now at 103-24. Stocks are a factor in the ground-holding. S&P futures shot up on the data, but were unable to break yesterday's highs. That was the cue for bond markets to bounce back to some extent. The impending stock market open could kick off another bout of directional movement for bonds and MBS, but for now, the lows are in. As far as the rest of the day, the next big event on the schedule is the 5yr note auction at 1pm. Beyond that, we're keeping an eye on 2.17 in 10yr notes. That's been a longstanding technical and is also roughly where 10's are holding their ground this AM. Even so, with Jackson Hole on the horizon (not because we expect anything to happen, but simply because we need to put it behind us), trading between now and then is likely of little consequence versus the trading that will come Friday afternoon and next week.

This time a year ago, Federal Reserve Chairman Ben S. Bernanke headed to an annual gathering of central bankers in Jackson Hole, Wyo., amid a faltering U.S. economy, a perilous global situation, and rising calls on Wall Street for the Fed to do something to address both. Here we go again. Bernanke is to deliver a speech Friday morning in the same ballroom in the shadow of the Grand Teton mountains where last year he gave a speech that laid the groundwork for a $600 billion program of bond purchases aimed at lifting the economy. The financial world is obsessing over the possibility of another go-round. The thought that Bernanke may offer hints of new steps to boost growth contributed to big gains on Wall Street Tuesday, with the Standard & Poor’s 500-stock index up 3.4 percent. (by Neil Irwin) more:

(Reuters) - New orders for long-lasting U.S. manufactured goods rose more than expected in July on strong demand for aircraft and motor vehicles, government data showed on Wednesday, but a gauge of business spending fell. The Commerce Department said durable goods orders surged 4 percent after a revised 1.3 percent drop in June, which was previously reported as a 1.9 percent fall. Economists polled by Reuters had expected orders to rise 2 percent last month. Orders were buoyed by a 14.6 percent jump in bookings for transportation equipment, which was the largest increase since January. Excluding transportation, orders unexpectedly rose 0.7 percent after gaining 0.6 percent in June. Economists had expected this category to fall 0.5 percent. But non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, fell 1.5 percent last month after a revised 0.6 percent rise in June. Economists had expected a 1 percent fall from a previously reported 0.4 percent gain. Last month, durable goods orders were buoyed by a 43.4 percent surge in aircraft orders, which erased June's 24 percent slump. Boeing received 115 aircraft orders, up from 48 in June, according to information posted on the plane maker's website. Motor vehicle orders jumped 11.5 percent, the largest increase since January 2003, after edging up 0.1 percent the previous month, indicating a fading of the supply chain disruptions from Japan. Outside of transportation, details of the report were mixed, with orders for machinery and computers and electronic products falling. However, orders for primary metals, and capital goods rose. Shipments of non-defense capital goods orders excluding aircraft, which go into the calculation of gross domestic product, edged up 0.2 percent after rising 1.9 percent in June. (Reporting by Lucia Mutikani; Editing by Neil Stempleman)