MBS MID-DAY: 10/28/2011

(Reuters) - U.S. consumer sentiment improved in October for the second month in a row as consumers felt more upbeat about the economy's prospects, a survey released on Friday showed.

The Thomson Reuters/University of Michigan's final reading on consumer sentiment overcame the weakness reported in the preliminary survey at the beginning of the month, though consumers' personal finance expectations remained gloomy.

The sentiment index picked up to 60.9 from 59.4 the month before, topping expectations for 58.0 among economists polled by Reuters. The preliminary October survey had seen a decline to 57.5.

The survey's gauge of consumer expectations also improved from the more than 30-year lows registered in the preliminary reading. The index rose to 51.8 from 49.4 in September, while the barometer of current economic conditions was up at 75.1 from 74.9.

A gauge of current personal finances edged up to 77 from 76, but expected personal finances eased to 103 from 104.

"Overall, it is still likely that real consumer expenditures will not be strong enough during the year ahead to enable the more robust economic growth that is needed to offset the negative grip of income and job stagnation on consumers' spending behavior," survey director Richard Curtin said in a statement.

The one-year inflation expectation eased to 3.2 percent from 3.3 percent, and the survey's five-to-10-year inflation outlook also declined to 2.7 percent from 2.9 percent. (Reporting by Leah Schnurr; Editing by Padraic Cassidy)

Those with the will to come into work today will at least be greeted by a modicum of relief for bond markets. But the key point is this: after more than a year of drama surrounding an impending Greek default, markets now must account for the possibility that there IS NO Greek default (despite the debate over the 50% haircut still constituting a default and the lack of clarity as to CDS Payouts).

There's also a glut of headlines this AM that generally combine to suggest a theme of "more questions than answers" remaining after yesterday's EU Summit and subsequent bond market sell-off (if a killer rally is a "face-melter" shall we call yesterday a "face-freezer?"). Bottom line there is to expect a major Round 2 of hullabaloo as EU leaders and markets alike sort through the operational details of what currently can best be described as "good start" in addressing the EU crisis.

In the meantime, MBS are like the opportunistic foraging mammals that sought their fortunes after the extinction of the dinosaurs, poking our heads out from behind rocks and caves this morning as we survey the scene of this brave new world--at least the "extinction" theme remains until 10's are back below 2.29. The point is that the TSY weakness isn't translating fully to MBS. Fannie 3.5’s are up 15 ticks this morning and trading at 100-31, a level they’ve seen in recent days, whereas 10yr yields are 4 bps up trading at unfamiliar levels in the mid 2.3’s (2.346 currently)

All in all, it's a great start to the day, but the potential for a new range trade to emerge with 2.29 as resistance (2.42 as support) in 10's needs to be watched carefully. The mere "avoidance of further losses" versus yesterday's closing levels would be a huge win for bond markets today. Consumer Sentiment is the next "mover" at 955am. If current levels hold, any rate sheets out before then should be improved vs yesterday, but perhaps not to the extent that gains would suggest.

(Reuters) - U.S. consumer spending rose in September as Americans saved less to fund purchases amid weak income growth, which could cast doubts over the durability of the third-quarter's economic growth spurt.

The Commerce Department said consumer spending increased 0.6 percent, matching expectations, after an unrevised 0.2 percent gain in August. Spending accounts for about 70 percent of U.S. economic activity.

With income edging up 0.1 percent last month, spending was at the expense of savings, which dropped to an annual rate of $419.8 billion, the lowest level since August 2009, from $479.1 billion in August. The saving rate fell to 3.6 percent, the slowest since December 2007, from 4.1 percent in August.

Income fell 0.1 percent in August and economist had expected a 0.3 percent increase in September. Inflation-adjusted disposable income slipped 0.1 percent, declining for a third straight month.

But subsiding inflation pressures should offer households some relief. A price index for personal spending rose at a 0.2 percent rate last month, slowing from Augusts' 0.3 percent pace. In the 12 months through September, the PCE index was up 2.9 percent after rising by the same margin in August.

A core inflation measure, which strips out food and energy costs, was flat last month after increasing 0.2 percent in August. In the 12 months through September, core PCE rose 1.6 percent after increasing 1.7 percent in August. (Reporting by Lucia Mutikani; Editing by Neil Stempleman)