MBS MID-DAY: 12/19/2011

Homebuilders are more optimistic than they've been about single-family home sales in a year and a half according to a report released today by the National Association of Home Builders.

The Housing Market Index rose to 21 versus consensus estimates of 20. Last month's reading was revised down from 20 to 19.

Despite the moderate pace of the increase, this is the highest level since May 2010, and begins a week of generally improving expectations across several housing-related economic reports. Tomorrow's Housing Starts, Wednesday's Existing Home Sales, and Friday's New Home Sales are all expected to have improved marginally over previous reports. The economic calendar also includes the Mortgage Banker's Association weekly report on mortgage applications, FHFA's Home Prices, and Building Permits (see the full calendar in The Week Ahead)

There has been some recent speculation that housing market data could be on the verge of a shift, potentially moving away from an extended period of stagnant, historically low levels. While today's NAHB Confidence level does show some promise relative to recent months and years (apart from May 2010, it's the highest since 2007), it would have a long climb ahead in order to ever regain its pre-meltdown levels:

The following piece from Reuters is a good broad overview of European events from the overnight session as well as a look ahead to potential bond market movers through the week.

(Reuters) - European finance ministers will pursue plans to enhance the IMF's arsenal and press on with a drive for tighter fiscal rules in an attempt to assuage doubts they can overcome their sovereign debt crisis.

With new governments in Italy and Spain redoubling austerity efforts, the EU ministers will discuss via a teleconference the draft text of a new euro zone "fiscal compact" so that it can be finalised by the end of January, EU officials said.

Having agreed to offer 150 billion euros to the International Monetary Fund to raise its crisis-fighting capacity, they will also consider the size of individual bilateral loans to the Fund in talks starting at 1430 GMT.

There are doubts about the scheme. Germany's Bundesbank said last week it would only contribute if non-euro zone and non-European countries did too and the level of outside commitment is not clear.

We find ourselves this Monday morning in the familiar position of watching and waiting for news out Europe, meanwhile adjusting/reacting to existing news out of Europe and to a lesser extent, in the US. It could, and probably should be said that after last week, the US Treasury auction cycle plays an important role in determining MBS Prices this week, but even that ostensibly American event is made more interesting by the extent to which foreign accounts may or may not step in to help maintain the aggressive demand that propped up lofty bond prices last week.

The auction cycle is once again nudged forward by one day, meaning that today kicks things off with the 2yr Note at 1pm (5's and 7's in the next two days). This has been the most boring and uneventful of the core auctions since the Fed adopted their "2013 verbiage" and even then, was never much of an MBS market mover. Before that, NAHB's housing market index hits at 10am It's part of a slew of housing related economic data this week which in general, are more interesting industry-specific anecdotes than market movers.

There's quite a bit of economic data set for Thursday and Friday, but it will have to compete with waning participation ahead of the holidays as well as the ongoing preference for European news. To that end, the biggest example could be the long-term repo operation tomorrow. Since the ECB naturally can't commit to buying unlimited amounts of Euro zone debt, it can apparently lend out billions of Euros for 3 years so that borrowing countries can simply do it themselves. The actual amount of this 3 year "gimme" tomorrow is as-yet undetermined, but its announcement is a big potential mover for tomorrow, along with the need to prep for 5 yr auction.

So far, it seems that what little volume there is, is coming out a bit conservatively ahead of these considerations. MBS are down 7 ticks at 102-14 and 10yr yields are up just over 2bps at 1.8749