MBS RECAP: Up Down Up

Often overlooked in all the J-Hole hullabaloo, tomorrow also contains 3 pieces of economic data that are not insignificant. Q2 final GDP at 830am as well as corporate profits, and Consumer Sentiment at 9:55am. Then Bernanke at 10am. For a closer look at previous results and the current consensus on the data, check this link:

No sooner did the clock tick 2pm than 10's began to toe the line they've been holding in the mid 2.24's. That marks 1 hr to go until the official bond-market close and yesterday's trading pattern is a bit of a cause for concern in that regard. Yields had been holding under support (much like today) until the 3pm close and then rose another 5 bps in short order. There's no major mathematical thesis here other than "late day volatility surround the 3pm close." So when we see yields testing a weak point right as we get within one hour of the close, we feel a bit more cautious. No negative reprice risk right now, but stay vigilant for a break above 2.25 in10's. Fannie 4.0's are still doing "OK," at 103-18, right about in the middle of today's mostly narrowing trading range. 3.4's are at 100-21.

Consider that Treasuries rallied into today's auction as opposed to building in additional concession from yesterday, and that 7yr notes have been historically tough auctions, and that 7s have been outperforming vs other TSY offerings. That's why we'd say that an average Bid-to-Cover and only slight miss of the 1pm when-issued yields (When-Issued of "WI" can be thought of as the running estimate of where the auction's high-yield will come in) constitute a decent auction. Levels since the auction agree. 10's are at 2.227, seemingly more concerned with stocks than trading an auction reaction (this was expected). MBS are doing OK. 4.0's made it up to 103-22 and are back down to 103-18 now, still green on the day, still in the running for potential reprices for the better (as long as we hold here or higher).

(Reuters) - The U.S. economy will continue to grow at a modest pace as consumers and businesses pare back excessive amounts of debt, a top Federal Reserve official said. "I don't see a double-dip recession," Thomas Hoenig, president of the Kansas City Federal Reserve Bank, said in an interview with Reuters Insider television. The world's largest economy should expand by between 2 percent and 2.5 percent over the remainder of this year, said Hoenig, whose institution is hosting an annual conference in this mountain valley that draws central bankers and leading economists from around the world. Hoenig played down the significance of two recent gloomy regional reports on manufacturing. Surveys by the Philadelphia and Richmond Fed banks showing weak factory activity in the U.S. Mid-Atlantic and Central Atlantic regions were taken during a period of stock market turmoil and likely reflected the uncertainty of that period, he said. A similar survey by the Kansas City Fed covering Kansas and surrounding states released on Thursday was soft, but not as dramatically so.

Fannie 4.0's are 5 ticks higher than last check, and they've been trading an increasingly narrow range and in a generally positive direction, now up to 103-22 with Fannie 3.5's up 9 ticks on the day at 100-23. 10yr notes remain over the 2.21 technical level that provided resistance earlier, but only slightly at 2.2145. S&P's just dipped into the 1150's (1159.27), so our fingers are crossed for a pivot bounce lower. But if 10's and MBS merely hold onto current levels, some lenders might consider repricing for the better even before the 1pm auction, though we'd wager most would wait the 20 minutes. A marked bond market improvement following the auction would increase positive reprice likelihood to "near certainty" levels, but vice versa for a negative reaction.

S&Ps have sold off from 1190 to 1165, bringing TSY yields down from around 2.28 to 2.23 in 10yr notes. Treasuries are looking for S&P's to break back into the 1150's before 10yr notes dip below 2.21, a feat they've not accomplished yet today. 10's bounce at 2.21 coincided with S&P's bounce at 1160. MBS are noticeably lagging Treasuries, especially the higher coupons. That behavior couldn't be any more logical considering the government sponsored refi talk this morning. With impetus and ability to easily refi to 4%, many loans in MBS pools with 4.5 coupons and up would be at a greatly increased risk of seeing a huge uptick in payoffs (as the old loans are retired). Since investors paid a premium for those coupons (prices over 100-00), they're counting on them to stick around long enough to be profitable (higher price, but higher coupon rate = higher monthly clips for investors, but if they're paid off early, those investors lose). 4.0's are in a bit of a grey area here as some loans in 4.0 coupons might opt for the refi program (if it happens). Fannie 4.0's are currently at 103-17, up a tick on the day, but everything else up the stack is in the red. 3.5's, the most immune from a potential refi program are the only green coupon in the production stack, up 4 ticks at 100-18.

(Reuters) - A gauge of factory activity in Kansas and surrounding states pointed to modest growth in August, standing in contrast with other surveys that have suggested weak U.S. manufacturing during the month. The Federal Reserve Bank of Kansas City said on Thursday its composite index of regional manufacturing held steady at 3 in August, unchanged from a month earlier. "Factory activity in our region continues to be buoyed by strong growth among agriculture and energy-related manufacturers," said Kansas City Fed economist Chad Wilkerson. Last week, the Philadelphia Fed's factory survey showed output plunged in the Mid-Atlantic region in August, dampening hopes for a quick revival in growth. Data from other regional Fed factory indexes has also been weak. Any reading below zero in the Kansas City Fed index indicates contraction in the region's manufacturing. The index is a measure of factory output, shipments, new orders and employment in the region. The index for output was minus 2 during August, pointing to contraction, while employment and new orders indexes pointed to growth. The survey covers factories in Kansas, Colorado, Nebraska, Oklahoma and Wyoming, as well as the western third of Missouri and the northern half of New Mexico. (Reporting by Jason Lange; Editing by Neil Stempleman)