MBS RECAP: 2/29/2012

- Economic Activity Increased At A Modest To Moderate Pace
- Manufacturing Continued At A Steady Pace
- Nonfinancial Services Activity Remained Stable Or Increased
- Banking Conditions Generally Improved
- Consumer Spending Generally Positive, Outlook Modestly Optimistic
- Housing Market Conditions Improved Somewhat
- Hiring Increased Slightly Across Several Districts
- Wage Pressures Generally Contained
- Prices Stable; Some Pass-Through Of Higher Input Costs

"Demand for residential mortgage loans increased in New York, Richmond, and Kansas City; mortgage demand was flat to moderately stronger in St. Louis and softened in Kansas City. Cleveland noted increases in requests for commercial real estate lending, while contacts in Chicago and San Francisco noted improvement in the availability of credit for this sector. Meanwhile Philadelphia and Kansas City reported flat or steady commercial real estate lending. Demand for commercial real estate loans was flat to moderately stronger in St. Louis.

Overall lending standards remained restrictive in San Francisco and Richmond and were largely unchanged in St. Louis and Kansas City. Lending standards tightened further for commercial borrowers in New York. Credit conditions in Chicago improved slightly, while quality improved in Philadelphia and Kansas City. Delinquencies were steady or declined in Cleveland. Mortgage delinquencies were steady in the New York District but delinquencies decreased in other loan categories..."

For all the apparent drama on the short term charts, today's sell-off in bond markets is rather orderly in broader contexts. Traders have grown increasingly accustomed to finding opportunities in market movement that is historically narrow. In other words, 2.10 to 1.90 is wide-enough range for buyers near the highs and sellers near the lows.

In that sense, we might reasonably expect that Bernanke would have to have been unexpectedly dovish today in order to get 10yr yields to break lower than 1.90. As he did not, in fact, make any mention of QE3 at all, markets logically went right back from whence they came. 10yr yields returned to the mid-point of their recent range with eerie proficiency and have been grinding sideways there, almost as if it was scripted.

It's a similar story for MBS. Fannie 3.5's sought out a highly traveled pivot point in 103-10, which provided resistance in January (ceiling) and support in February (floor). Prices are currently 7 ticks lower on the day at 103-12, but indeed have seen a majority of their supportive bouncing take place at 103-10. That makes a moderate break lower from there seem like an excellent short term lock suggestion.

We're careful to point out "short term" here as the longer term trends are still very much converging/consolidating, both in MBS and Treasuries. Each market has long term bullish trends colliding with shorter term bearish trends. There's really no question of the convergence, but the direction of the break and concomitant magnitude of the move are, as yet, undetermined.

Long story short, 103-10 is looking supportive for now, although lenders continue repricing for the worse. This could be one of those afternoons where we see the "early-to-act" lenders come back with a positive reprice if the bounce continues to materialize.