MBS MID-DAY: 9/13/2011

CoreLogic today released Q2 negative equity data showing that 10.9 million, or 22.5 percent, of all residential properties with a mortgage were in negative equity at the end of the second quarter of 2011, down very slightly from 22.7 percent in the first quarter. An additional 2.4 million borrowers had less than five percent equity, referred to as near-negative equity, in the second quarter. Together, negative equity and near-negative equity mortgages accounted for 27.5 percent of all residential properties with a mortgage nationwide. The new report also shows that nearly three-quarters of homeowners in negative equity situations are also paying higher, above-market interest on their mortgages.

There are nearly 28 million outstanding mortgages that have above market rates and are in theory refinanceable. Twenty million borrowers with positive equity, or 53 percent of all above-water borrowers, have above market rates.

Things have been a bit choppy so far this morning, but contained within a range between yesterday afternoon's highs and lows as far as MBS are concerned.

10yr yields on the other hand, are at their weakest levels since Friday morning, currently at 1.96. Fannie 4.0's are trading a range between 104-09 and 104-13 so far, currently down 1 tick on the day at 104-10. Fannie 3.5's are down 2 ticks at 101-14.

The only data this morning was Import/Export prices which were of little consequence. Rumors of China buying Italian debt were refuted by China overnight (surprise surprise...). Rumors of BNP Paripas not being able to borrow dollars in money markets were also refuted by BNP.

Markets remain susceptible to unexpected Euro Headlines as well as the results from the 1pm 10yr Treasury Auction.

Rate sheets should be nearly flat today and so far, look like they'll be out on time based on the currently "manageable" level of volatility.

(Reuters) - Bill Gross, the manager of the world's largest bond fund, increased exposure to Treasuries dramatically in August, reflecting his view of the rising risks of recession in the United States.

According to PIMCO's website on Monday, Gross' $245 billion Total Return Fund (PTTRX.O) held 16 percent in U.S. Treasuries and Treasury-related securities as of the end of Aug. 31, up from 10 percent as of the end of July.

In late August, Gross told Reuters that the precipitous decline in Treasury yields reflected a high probability of recession. The yield on the benchmark 10-year U.S. Treasury note then dropped below 2 percent to 1.98 percent. On Monday, the 10-year yield stood at 1.95 percent.

Treasuries "certainly reflect, in terms of their yields, not only a potential for a recession, but the almost high probability of recession and the result of lowering of inflation -- that is key," Gross said in August.

The Government Treasury classification in Gross' flagship fund includes fund holdings of U.S. Treasury notes, bonds, futures and inflation-protected securities, Pacific Investment Management Co said. In June, the Total Return fund held only 8 percent in U.S. Treasuries and Treasury-related securities.

Gross, who also helps oversee $1.2 trillion in assets as co-chief investment officer at PIMCO, also increased the Total Return fund's stake in non-U.S. debt and mortgages. In August, non-U.S. debt accounted for 18 percent of the Total Return portfolio, up from 13 percent in July. For its part, mortgages accounted for 32 percent of the fund in August, up from 25 percent the previous month.

(Reuters) - U.S. import prices fell in August due to lower fuel, food and industrial material costs, a government report showed on Tuesday.

A drop in prices for petroleum helped push import prices 0.4 percent lower following a 0.3 percent increase in the previous month, the Labor Department said.

Analysts polled by Reuters had expected import prices to fall 0.8 percent in August.

Excluding petroleum, import prices rose 0.3 percent, accelerating from a 0.1 percent increase in July.

Prices for imported cars and car parts were unchanged last month, while consumer goods rose 0.3 percent when autos and parts were stripped out.

Export prices rose 0.5 percent in August after falling 0.4 percent in July. Economists had expected export prices to be unchanged last month. (Reporting by Jason Lange, Editing by Andrea Ricci)