MBS MID-DAY: 1/6/2012

MBS and Treasuries both encountered their first significant instances of resistance in what has otherwise been a relatively uninterrupted rally since shortly after the 830am jobs data. Both markets initially weakened, but MBS now sit at 102-31+ and 10yr yields at 1.961.

Each market is contending with the aformentioned resistance, just beyond current levels, 103-03 for MBS and just over 1.95% for 10yr yields. After failing to break resistance several times around the 10am hour, MBS fell only mildly to 102-30, making for another day of extremely narrow ranges which has been extremely good for pricing. A few lenders were quick to reprice for the better just after the pivot point bounce at 102-30.

"supportive bounce at 102-30 in 3.5 MBS following a 50k beat on NFP..." It's a brave new world... Yes, 3.0 prices are higher and yes they are being traded here and there, but still in very small amounts and in very small proportion to 3.5's. There have been about 3500 ticks of bid/ask updates and/or trade executions in 3.5s compared to about 250 in 3.0s, or about 14:1 since Wednesday. Thinking back to the emergence of 3.5's as viable coupons in which to make markets, it wasn't until that ratio fell consistently under 10:1 that volume began to meaningfully increase. We're getting closer, but definitely not there yet.

Back to the main order of business for a moment... some lenders have repriced, others might, others might not (due to the earliness in the day of the rally), but reprices for the worse are not a concern, so we'd either float until they are, or be afraid of pipeline control reprices which are a distinct possibility this afternoon given record rate sheet offerings combined with the looming possibility of rate sheet adjustments at several lenders due to the tax-cut extension +10bps to G-Fees.

The November Mortgage Monitor report released by Lender Processing Services, Inc. shows that while mortgage delinquencies at the end of November 2011 were nearly 25 percent less than the January 2010 peak, the trend toward fewer loans becoming delinquent, which dominated 2010 and the first quarter of 2011, appears to have halted. At the same time, new problem loans - those loans seriously delinquent as of the end of November that were current six months prior - have not improved significantly in the last year. This degree of stagnation indicates that while the situation is not getting markedly worse, it is not improving either, and inventories of troubled loans remain significantly higher than pre-crisis levels across the board.

The November mortgage performance data also showed both new and repeat foreclosure starts dropped sharply in November, down nearly 30 percent from the month prior. As late-stage delinquencies in the pipeline still number close to 2 million, the sharp drop is more indicative of the impact of ongoing document reviews, additional state legislation and new regulatory requirements rather than a shift in trend.

Dudley says:

-Appropriate to consider more monetary easing
-Outlook for unemployment is 'unacceptably high'
-Monetary policy, housing policy are 'complements'
-'Outlook for inflation is moderate'
-Calls for 'Additional housing policy interventions'
-Says weak housing market impedes vigorous economic recovery
-Housing programs would make fed policy 'more effective'

Here is the full speech.

• RTRS - NONFARM PAYROLLS +200,000 (CONSENSUS +150,000) VS NOV +100,000 (PREV +120,000), OCT +112,000 (PREV +100,000)
• RTRS - PRIVATE SECTOR JOBS +212,000 (CONS +165,000), NOV +120,000 (PREV +140,000)
• RTRS - GOVERNMENT JOBS -12,000 VS NOV -20,000 (PREV -20,000)
• RTRS - JOBLESS RATE 8.5 PCT (CONSENSUS 8.7 PCT) VS NOV 8.7 PCT (PREV 8.6 PCT)
• RTRS - U.S. LABOR FORCE PARTICIPATION RATE 64.0 PCT IN DEC VS 64.0 PCT IN NOV
• RTRS - AVERAGE HOURLY EARNINGS ALL PRIVATE WORKERS +0.2 PCT (CONS +0.2 PCT) VS NOV 0.0 PCT (PREV -0.1 PCT), TO $23.24 VS NOV $23.20; DEC YEAR-ON-YEAR EARNINGS +2.1 PCT
• RTRS - AVERAGE WORKWK ALL PRIVATE WORKERS 34.4 HRS (CONS 34.3 PCT) VS NOV 34.3 HRS (PREV 34.3), FACTORY 40.5 VS 40.4, OVERTIME 3.2 VS 3.3
• RTRS - FACTORY JOBS +23,000 (CONS. +5,000) VS NOV +1,000 (PREV +2,000)
• RTRS - GOODS-PRODUCING JOBS +48,000, CONSTRUCTION +17,000, PRIVATE SERVICE-PROVIDING JOBS +164,000, RETAIL +27,900
• RTRS - AGGREGATE WEEKLY HOURS INDEX FOR ALL PRIVATE WORKERS +0.5 PCT VS NOV -0.2 PCT
• RTRS - JOBLESS RATE LOWEST SINCE FEB 2009 (8.3 PCT)
• RTRS - COURIER, MESSENGER JOBS +42,000, MAY REFLECT INCREASED ONLINE PURCHASES FROM HOLIDAY SEASON--LABOR OFFICIAL

Non-Farm Payrolls came in quite a bit higher than forecast: 200k vs 150k, but quite a few economists revised up their outlook yesterday after the big ADP beat to something closer to today's 200k level. Indeed the private payroll component led the charge on today's NFP comping in at +212k vs a 165k consensus and 120k previous reading. Unemployment, which was almost universally forecast to rise in this month's report, "mysteriously" fell 0.2 to 8.5% with no change in the labor participation rate to explain the positivity away.

MBS and Treasuries initially moved lower in price on the news, but have bounced back well with Fannie 3.5's down only 3 ticks on the day at 102-26 and 10yr yields up not even 2 bps at 2.012. So far so good as far as bond markets weathering a moderate storm of better than expected NFP.