MBS MID-DAY: 11/21/2011

MBS are currently making up for some of the ground they lost earlier this morning versus Treasury benchmarks. Thin Monday morning conditions combined with higher-than-normal levels of origination resulted in MBS significantly underperforming out of the gate.

Interestingly, MBS have been mirroring movements in Stock prices to a greater degree than Treasuries, and several investor classes have notably come out of hiding into the stock market weakness with the Fed being the notable absentee. Money managers, REITs and other "Real Money" accounts as well as "Fast Money" accounts such as Hedge Funds all jumped on the bid-side bandwagon and Fannie 3.5's now find themselves up 7 ticks on the day at 101-28 while 10yr yields continue to struggle to break through a 1.95 yield level (currently 1.9533).

Whether or not this is sufficient for positive reprices is somewhat questionable as the gains are still occurring within a fairly tight range, and many lenders will not have released rates early enough or weakly enough to justify it. We'd need the gains to hold for a longer amount of time or for further gains to be seen.

(Reuters) - U.S. existing home sales unexpectedly rose in October as low interest rates for mortgages and rising rents led more homebuyers into the market, the National Association of Realtors said on Monday.

Sales climbed 1.4 percent to an annual rate of 4.97 million units from September's revised rate of 4.90 million, the NAR said. Forecasters in a Reuters poll had expected the annual rate to fall to 4.8 million.

Despite the modest increase in sales, the median sales price for existing homes was 4.7 percent lower in October than it was a year earlier.

(Reporting by Jason Lange; Editing by James Dalgleish)

The US Supercommittee charged with developing a plan to stave off another budget shortfall is expected to announce their failure today to meet a midnight deadline on an agreement. Such a failure would trigger automatic budget cuts that would go into effect in 2013. So given the fact that there's no immediate fallout from a potential failure today, we're a bit skeptical about accepting the notion that the Supercommittee's failure is a major market mover this morning.

Instead we see the following as the primary drivers and the aforementioned committee failure as a potential complementary player:
- Spanish yields moved higher overnight as The Telegraph reports that Traders are braced for a turbulent day amid warnings that Spains newly-elected Prime Minister Mariano Rajoy lacks the policies needed to stave off a bail-out."

- France has the weakest economic fundamentals of the 6 top-rated countries in the EU and Moody's warned about their ratings outlook overnight.

- After some optimism swept through markets on Friday over the burgeoning potential of a "Eurobond," there has been a slight pull-back in that optimism as EU's Barnier says that stricter oversight was needed before a Eurobond was possible.

-Italian CDS widened appreciably (a fact that was reported via Markit just shortly before the most major slide in the Euro during the overnight session)

-The Times reports that options investors are paying record prices to guard against a bear market in stocks for 2012

The first major economic data of the day is Existing Home Sales at 10m followed by the 1pm auction of 2yr Treasury Notes.

MBS are up a mere 1/32nd at 101-22 in Fannie 3.5's while Treasuries outperform with 10yr yields down over 5bps at 1.9533. All in all though, a measured move within the range. Hopefully MBS will do a bit of catching up as the day progresses.