MBS MID-DAY: 3/14/2012

Subject: FHA Refinance of Borrowers in Negative Equity Positions: Program Enhancements Background: On August 6, 2010, the Department of Housing and Urban Development (HUD) published Mortgagee Letter (ML) 2010-23 “FHA Refinance of Borrowers in Negative Equity Positions” which provided enhancements to the Federal Housing Administration (FHA) refinance program that allows responsible homeowners with negative equity an opportunity to refinance their homes. These enhancements were designed to maintain homeownership by providing borrowers with conventional loans, who owe more on their mortgage than the value of their home, opportunities to refinance into an affordable FHA loan. This opportunity allows only non-FHA insured loans to qualify for an FHA refinance loan provided that the lender or investor writes off the unpaid principal balance of the original first lien mortgage by at least 10 percent…

To be clear, there is no breaking news or economic data driving the trade in bond markets at the moment. There's not really anything significant about yesterday's news or events that inspired current levels. Current levels are a result of snowball of selling. Such snowballs take on lives of their own once they gain certain mass and that's exactly what we're seeing here.

10yr yields came within 0.03 of touching their 200 day moving average at 2.25% and currently trade at 2.23. Fannie 3.5's are down 16 ticks on the day now at 102-14. At this point, today's losses are surpassing yesterday's in scale.

Support levels are much less clearly defined and have nothing by way of recent precedent to inform them in this range, but 2.25 at the 200-day moving average and 2.27, an old pivot from August and October have some potential significance. 2.136 is a resistance floor now.

If you had pricing before 10am, reprices for the worse are already a risk, although you might give things a few minutes to bounce back, and potentially hold off if we're at 102-16 or higher in Fannie 3.5's.

We suspect that any inclination to bounce back will get more support after today's 30yr Bond Auction if it's well-received in the slightest, but bear in mind that "bounces back" are more about damage control than about reversing the snowball. It won't roll uphill.

Although the worst levels of the domestic session were seen right at the open, MBS and Treasuries continue to make uninspired attempts to move away from those levels.

Fannie 3.5's are down 12 ticks on the day at 102-17 and 10's are up almost 9bps from the 3pm close at 2.195.

The morning's economic data is an almost offensive waste of time for markets that have more pressing concerns today than Import/Export prices and International trade deficits.

The chief concerns surround the notion of determining how much more pain will we see before getting some sort of confirmed stop to the bleeding. The best case scenario in that regard is to sort of meander in sideways volatility ahead of the 30yr Auction at 1pm, maybe making up a small amount of ground in the process. But we could certainly see 10's over 2.20 in the meantime as well.

In the bigger picture,10's would need to put in quite a bounce for today to stand as anything other than a major loss and confirmed turning point for broader bond markets. The yield to hope for in this headiest of scenarios would be the 2.136 retracement level between Septembers lows and October's highs (1.674 - 2.421), the boundaries of the "new era" range that began with the early August rally surrounding the FOMC Announcement with the introduction of "2013" verbiage.

*Import Prices +0.4 pct vs +0.6 pct forecast
*Export Prices +0.4 pct vs +0.4 pct forecast
*Excluding Oil, Import Prices down 0.2 pct

U.S. import prices increased 0.4 percent in February, the U.S. Bureau of Labor Statistics reported today, as higher fuel prices more than offset declining nonfuel prices. The price index for imports was unchanged in the two previous months. U.S. export prices also rose 0.4 percent in February after a 0.2 percent advance in January.

All Imports: The 0.4 percent February increase marked only the second time that import prices have recorded a monthly advance greater than 0.1 percent since the index rose 2.6 percent in April 2011. Prices for overall imports increased 5.5 percent over the past 12 months, the smallest year-over-year rise since the index advanced 5.3 percent between December 2009 and December 2010.

Exports: The 0.4 percent advance in export prices in February marked the largest monthly increase since a 0.5 percent rise in September. Higher nonagricultural prices more than offset a decline in the price index for agricultural exports. Despite recording the largest monthly increase in five months, overall export prices rose only 1.5 percent over the past 12 months, the smallest year-over-year advance since a 0.4 percent rise for the November 2008-09 period.