MBS MID-DAY: 2/2/2012

"Uncertain job prospects, along with tight mortgage credit conditions, continue to hold back the demand for housing. Although low interest rates on conventional mortgages and the drop in home prices in recent years have greatly improved the affordability of housing, both residential sales and construction remain depressed. A persistent excess supply of vacant homes, largely stemming from foreclosures, is keeping downward pressure on prices and limiting the demand for new construction..."

• RTRS – BERNANKE SAYS FED WILL CONTINUE TO MONITOR SITUATION IN EUROPE CLOSELY, TAKE EVERY AVAILABLE STEP TO PROTECT U.S. FINANCIAL SYSTEM, ECONOMY
• RTRS – BERNANKE, IN PREPARED TESTIMONY TO CONGRESS: SEEING SIGNS CONCERNS THAT HAVE BEEN WEIGHING ON U.S. BUSINESS INVESTMENT ARE ABATING SOMEWHAT
• RTRS -- STILL HAVE A LONG WAY TO GO BEFORE LABOR MARKET CAN BE SAID TO BE OPERATING NORMALLY
• RTRS -- SLUGGISH EXPANSION HAS LEFT ECONOMY VULNERABLE TO SHOCKS, UNCERTAIN OUTLOOK WARRANTS CLOSE MONITORING
• RTRS -- HOUSEHOLDS CONTINUE TO FACE SIGNIFICANT HEADWINDS; CONSUMER SENTIMENT HAS IMPROVED BUT REMAINS LOW BY HISTORICAL STANDARDS
• RTRS -- INFLATION HAS DECLINED, FED EXPECTS IT TO REMAIN SUBDUED
• RTRS -- LARGE AND INCREASING LEVEL OF GOVERNMENT DEBT RUNS RISK OF SERIOUS ECONOMIC CONSEQUENCES
• RTRS -- AS FISCAL POLICYMAKERS ADDRESS ISSUE OF FISCAL SUSTAINABILITY, SHOULD TAKE CARE NOT TO UNNECESSARILY IMPEDE ECONOMIC RECOVERY

Stocks and Treasury yields moved up after the speech was released, but stocks have not yet broken their previous highs from just after 9:30am. MBS still holding a steady "sideways" and not showing a reaction yet.

-30-year fixed-rate mortgage (FRM) averaged 3.87 percent with an average 0.8 point for the week ending February 2, 2012, down from last week when it averaged 3.98 percent. Last year at this time, the 30-year FRM averaged 4.81 percent.

-15-year FRM this week averaged 3.14 percent with an average 0.8 point, down from last week when it averaged 3.24 percent. A year ago at this time, the 15-year FRM averaged 4.08 percent.

-5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.80 percent this week, with an average 0.7 point, down from last week when it averaged 2.85 percent. A year ago, the 5-year ARM averaged 3.69 percent.

-1-year Treasury-indexed ARM averaged 2.76 percent this week with an average 0.6 point, up from last week when it averaged 2.74 percent. At this time last year, the 1-year ARM averaged 3.26 percent.

Fannie Mae, the single largest source of mortgage financing for rental housing, today announced 2011 results for its multifamily business. As the demand for quality, affordable rental housing increased in 2011, the company and its lender partners provided $24.4 billion in debt financing for 2,763 mortgage loans. Approximately 98 percent ($23.8 billion) of the debt that Fannie Mae financed in 2011 was delivered through the MBS execution.

Fannie 3.5's have traded into the 104's this morning following the day's 2 economic reports at 8:30am, although not necessarily because of the data. In other words, overnight momentum has merely carried over into the opening hour. After several bounces on a ceiling of 1.85%, 10yr notes ground lower overnight, getting choppy and improving in European hours. We're effectively right where we were at 5pm last night, and domestic data has done little to change that.

We're not seeing a lot on tap to cause convicted directional moves for bond markets, with Bernanke's Congressional appearance and scheduled Fed Buying the only decent candidates remaining this morning, at least as far as domestic events are concerned. Determining exactly what is happening with Greece's private sector involvement with their bailout/bond-swaps continues to be a mysterious endeavor. Any increasing level of clarity on the matter could also have an impact, but it does feel like we've already begun holding our breath for NFP, and thus expect a range trade in benchmarks with a 5bps swing in either direction of unchanged.

Nonfarm business sector labor productivity increased at a 0.7 percent annual rate during the fourth quarter of 2011, the U.S. Bureau of Labor Statistics reported today. The gain in productivity reflects increases of 3.6 percent in output and 2.9 percent in hours worked. (All quarterly percent changes in this release are seasonally adjusted annual rates.) From the fourth quarter of 2010 to the fourth quarter of 2011, productivity grew 0.5 percent, as output rose 2.3 percent and hours rose 1.8 percent. (See table A.) Annual average productivity increased 0.7 percent from 2010 to 2011. (See table C.)

Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors, and unpaid family workers.

Unit labor costs in nonfarm businesses increased 1.2 percent in the fourth quarter of 2011, as productivity grew at a slower rate (0.7 percent) than hourly compensation (1.9 percent). Unit labor costs rose 1.3 percent over the last four quarters. (See table A.) Annual average unit labor costs increased 1.2 percent from 2010 to 2011. (See table C.)

BLS defines unit labor costs as the ratio of hourly compensation to labor productivity; increases in hourly compensation tend to increase unit labor costs and increases in output per hour tend to reduce them.

Reuters Wires:

• 08:30 - - U.S. Q4 NON-FARM PRODUCTIVITY +0.7 PCT (CONSENSUS +0.8 PCT), Q3 +1.9 PCT (PREV +2.3 PCT)
• - U.S. Q4 NON-FARM UNIT LABOR COSTS +1.2 PCT (CONSENSUS +0.8 PCT), Q3 -2.1 PCT (PREV -2.5 PCT)
• 2011 NON-FARM PRODUCTIVITY +0.7 PCT, SMALLEST RISE SINCE 2008, VS 2010 +4.1 PCT
• 2011 NON-FARM UNIT LABOR COSTS +1.2 PCT, FIRST RISE SINCE 2008, VS 2010 -2.0 PCT

In the week ending January 28, the advance figure for seasonally adjusted initial claims was 367,000, a decrease of 12,000 from the previous week's revised figure of 379,000. The 4-week moving average was 375,750, a decrease of 2,000 from the previous week's revised average of 377,750.

The advance seasonally adjusted insured unemployment rate was 2.7 percent for the week ending January 21, a decrease of 0.1 percentage point from the prior week's unrevised rate.

The advance number for seasonally adjusted insured unemployment during the week ending January 21, was 3,437,000, a decrease of 130,000 from the preceding week's revised level of 3,567,000. The 4-week moving average was 3,527,500, a decrease of 43,000 from the preceding week's revised average of 3,570,500.

Reuters Wires:

JOBLESS CLAIMS FELL TO 367,000 JAN 28 WEEK (CONSENSUS 375,000) FROM 379,000 PRIOR WEEK (PREVIOUS 377,000)

4-WK AVG FELL TO 375,750 JAN 28 WEEK FROM 377,750 PRIOR WEEK (PREVIOUS 377,500)

CONTINUED CLAIMS FELL TO 3.437 MLN (CON. 3.550 MLN) JAN 21 WEEK FROM 3.567 MLN PRIOR WEEK (PREV 3.554 MLN)

INSURED UNEMPLOYMENT RATE FELL TO 2.7 PCT JAN 21 WEEK FROM 2.8 PCT PRIOR WEEK (PREV 2.8 PCT)

CONTINUED CLAIMS LOWEST SINCE 3.428 MLN IN WEEK ENDED SEPT 6, 2008