MBS MID-DAY: 2/23/2012

U.S. house prices fell modestly in the fourth quarter of 2011 according to the Federal Housing Finance Agency’s (FHFA) seasonally adjusted purchase-only house price index (HPI). The HPI, calculated using home sales price information from Fannie Mae-and Freddie Mac-acquired mortgages, was 0.1 percent lower on a seasonally adjusted basis in the fourth quarter than in the third quarter. On an unadjusted basis, prices fell 1.1 percent during the quarter. Over the past year, seasonally adjusted prices fell 2.4 percent from the fourth quarter of 2010 to the fourth quarter of 2011.

FHFA’s seasonally adjusted monthly index for December was up 0.7 percent from its November value. On a not-seasonally adjusted basis, prices were flat over the November-to December period.

-The seasonally adjusted purchase-only HPI rose in the fourth quarter in 27 states and the District of Columbia.

-Of the nine Census Divisions, the West South Central Division experienced the strongest prices in the latest quarter, posting a 1.1 percent price increase. Prices were weakest in the Middle Atlantic Division, where prices fell 1.2 percent.

-As measured with purchase-only indexes for the 25 most populated metropolitan areas in the U.S., four-quarter price declines were greatest in the Chicago-JolietNapervile, IL area. That area saw price declines of 9.8 percent between the fourth quarters of 2010 and 2011. Prices held up best in Warren-Troy-Farmington Hills, MI, where prices rose 3.5 percent over that period.

30-year fixed-rate mortgage (FRM) averaged 3.95 percent with an average 0.8 point for the week ending February 23, 2012, up from last week when it also averaged 3.87 percent. Last year at this time, the 30-year FRM averaged 4.95 percent.

15-year FRM this week averaged 3.19 percent with an average 0.8 point, up from last week when it also averaged 3.16 percent. A year ago at this time, the 15-year FRM averaged 4.22 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 2.82 percent. A year ago, the 5-year ARM averaged 3.80 percent.

1-year Treasury-indexed ARM averaged 2.73 percent this week with an average 0.6 point, down from last week when it averaged 2.84 percent. At this time last year, the 1-year ARM averaged 3.40 percent.

10yr yields rose to a pivot point just over 2.02 overnight and broke higher after a better-than-expected reading on Germany's IFO Business Climate Index. Things bounced back in a bond-friendly direction after downgraded EU growth forecasts but never went back below the 2.02+ pivot--not a great technical indication for this morning's trading.

This morning's Jobless Claims report--unchanged at 351k versus a revised 351k last week--did little to inspire directional shifts. MBS began the session in better territory than Treasuries versus yesterday's ranges. MBS are only 1 tick off at the moment at 103-11, closer to yesterday's stronger levels whereas most pieces of the Treasury complex are closer to yesterday's weakest levels.

The Jobless Claims report was our best opportunity for directional guidance this morning as FHFA Home Prices at 10am promise to be a relative non-event. The next 'biggie' on the horizon then, is the 7 yr Note Auction at 1pm. Volume has been decent, and markets are operating close to several key technical levels. We could see some volatility leading up to and away from this afternoon's auction as markets decide which side of those technical levels looks more inviting.

Levels:

• long term pivot at 2.04+ in 10yr yields... trouble getting much below 2.0% since last Friday
• 103-11 pivot in Fannie 3.5 MBS
• long term trend passing through 10yr yields in the 2.02's
• pivots at 103-13, 103-16 if MBS rally... 103-03 and 103-00 if they don't

• RTRS- JOBLESS CLAIMS UNCHANGED AT 351,000 FEB 18 WEEK (CONSENSUS 354,000) FROM 351,000 PRIOR WEEK (PREVIOUS 348,000)
• RTRS- JOBLESS CLAIMS 4-WK AVG FELL TO 359,000 FEB 18 WEEK FROM 366,000 PRIOR WEEK (PREVIOUS 365,250)
• RTRS- CONTINUED CLAIMS FELL TO 3.392 MLN (CON. 3.460 MLN) FEB 11 WEEK FROM 3.444 MLN PRIOR WEEK (PREV 3.426 MLN)
• RTRS- INSURED UNEMPLOYMENT RATE UNCHANGED AT 2.7 PCT FEB 11 WEEK FROM 2.7 PCT PRIOR WEEK (PREV 2.7 PCT)
• RTRS- 4-WEEK AVERAGE LOWEST SINCE MARCH 2008; CONTINUED CLAIMS LOWEST SINCE AUG 2008

Week Ended.....Initial Claims...4-Week Avg.
02/18/12.......351,000..........359,000
02/11/12.......351,000-R........366,000-R
02/04/12.......361,000..........367,000
01/28/12.......373,000..........377,250
01/21/12.......379,000..........377,750
01/14/12.......355,000..........379,750
01/07/12.......402,000..........382,500
12/31/11.......375,000..........374,000
R-revised. N/A - not available