MBS RECAP: 8/30/2011

August officially draws to a close tomorrow and as we've discussed in the past, "month-end" can be a supportive time for MBS. But do keep in mind that this refers mostly to their performance vs benchmarks like Treasuries and if bonds in general are suffering, MBS won't be immune. Attempting to offer guidance tomorrow will be several pieces of mid-tier data including ADP employment at 815am, Chicago PMI at 945am, Factory Orders at 10am and Fed Speak from Lockhart at 1130 am. For a more complete look at all this week's economic events, see the following link:

After an initial rally, bond markets are returning roughly in line with previous levels although MBS are nearer their best levels of the day than Treasuries. In fact, 4.0's and 3.5's are both at least 1 tick better than the highs seen after the Consumer Confidence print.

Fannie 4.0's are up almost half a point on the day at 103-31+ (half a tick from 104-00) and 3.5's are up 18 ticks on the day at 101-05. 10yr yields spiked down into the 2.15's briefly, but have since returned near 2.18. Stocks traded indecisively but have been rallying a bit and are now at 1212, two points under morning highs at 1215.

The FOMC minutes were enlightening. Some members wanted to go even further than "merely" laying out the mid-2013 time frame. In addition, we might see future policy decisions based on explicit numerical values for unemployment and inflation. Several noted their support of current policy due to the expectation that the jobless rate would remain well above levels consistent with their mandate, or that inflation levels would remain "at or below."

The Fed also shifted away from scapegoating "transitory" factors, and we now see that most voters thought only some of the weakness in the first two quarters was due to transitory factors. While most governors aggreed that the explicit 2013 timeline was useful guidance to the public, some said that none of the available tools could do much to support the recovery. In general, these minutes are markedly more downbeat than previous examples, and while this might easily be inferred from the changes in policy, they give us explicit examples of the shifting tone out of the Fed.

We'd be much less surprised to see reprices for the better at this point in the day. Depending on the lender, you might even expect them.

(Reuters) - A top Federal Reserve official who dissented from the U.S. central bank's move this month to ease monetary policy further signaled he would drop his opposition. But Minneapolis Fed President Narayana Kocherlakota stopped well short of saying he would support any further easing, and his remarks show he remains firmly on the hawkish wing of the Fed's policy-setting panel.

"I see no reason to revisit the decisions of August 2011. I believe that undoing this commitment in the near term would undercut the ability of the Committee to offer similar conditional commitments in the future, and this ability has certainly proved very useful in the past three years," Kocherlakota said. "So, I plan to abide by the August 2011 commitment in thinking about my own future decisions."

Kocherlakota, whose turn to vote on the Fed's policy-setting Federal Open Market Committee runs through the end of this year, stopped short of promising not to dissent on future Fed decisions, however, saying that "the case for any additional easing would have to be made on its own merits."

Fed Chairman Ben Bernanke plans a two-day policy-setting meeting next month to discuss possible plans for further easing. Originally the talks had been due to last only a day. Based on Kocherlakota's remarks, such a decision would be a hard sell for him, unless inflation dropped sharply. He expects the Fed's preferred gauge of inflation, core PCE (personal consumption expenditure), to rise to 2.1 percent next year versus an expectation of about 1.3 percent last November.

(Reporting by Ann Saphir; Editing by James Dalgleish)

(Reuters) - Bill Gross, the manager of the world's largest bond fund, feels like "crying in his beer" for having bet so heavily against U.S. government-related debt earlier this year, the Financial Times reported on Monday. Showing a more bearish view on the U.S. economy, Gross said PIMCO had initially dumped all of its U.S. debt holdings in March as he expected economic growth to be higher, resulting in inflation down the road. So far this year, PIMCO's Total Return fund has returned 3.29 percent, less than the 4.55 percent recorded by the Barclay's benchmark index. "When you're underperforming the index, you go home at night and cry in your beer," the Financial Times, in its online edition, quoted Gross as saying. "It's not fun, but who said this business should be fun. We're too well paid to hang our heads and say boo hoo." Gross, who oversees $1.2 trillion at PIMCO, said it was "pretty obvious" he wishes he had more Treasuries in his portfolio right now. "I get that it was my/our mistake in thinking that the U.S. economy can chug along at 2 per cent real growth rates. It doesn't look like it can." When U.S. Treasuries yields fell to 60-year lows earlier this month, Gross said investors were pricing a higher probability of recession in the United States. In May, he had said the only way PIMCO would purchase Treasuries again was if the United States headed into another recession. He told the Financial Times that his view on the U.S. economy significantly changed earlier this month after the Federal Reserve promised to keep interest rates low for at least another two years earlier. "Freezing rates for two years, that was a pretty significant statement in terms of the vulnerability of Treasuries to go down in price and up in yield," Gross said. (Writing by Walter Brandimarte; Editing by Dan Grebler)