MBS MID-DAY: 3/21/2012

Of all the week's scheduled reports on housing, Existing Home Sales was probably the best bet to elicit any sort of market response. Although it hit at an opportune time, considering bond markets were at the edge of their 2 day range and stocks were trying to decide if they would break to new highs, the 10am report coincides with a break of that range for bond markets and a bounce lower in stock prices.

Despite the uptick in volume and stronger price action in the bond market following the report, we're already seeing some evidence of resistance at 2.31 in 10's and just a tick over yesterday's 102-03 highs in Fannie 3.5's. Fannie 4.0's are similarly in line with yesterday's highs at 104-12.

All of this is a marked improvement from the earlier resistance but it hasn't extended much. Even so, this is the best opening few hours we've seen since March 6th. If we can scrape together a bit more of a rally, we'll be through the first important technical test establishing yesterday's touch of 2.40 (2.399 to be exact) as a supportive ceiling in 10's, concomitantly reinforcing the epic and ancient 101-25-ish price levels in Fannie 3.5's.

Tradeflows and technicals continue to dominate, so we watch, wait, and react. So far so good today...

*4.59 mln annual rate vs consensus 4.62 mln
* down 0.9 pct vs January up 5.7 pct
* 6.4 months supply, 2.43 mln units

February existing-home sales declined from an upwardly revised January pace but are well above a year ago, while the median price posted a slight gain, according to the National Association of Realtors®. Sales were up in the Midwest and South, offset by declines in the Northeast and West.

Total existing-home sales1, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, slipped 0.9 percent to a seasonally adjusted annual rate of 4.59 million in February from an upwardly revised 4.63 million in January, but are 8.8 percent higher than the 4.22 million-unit level in February 2011.

Lawrence Yun, NAR chief economist, said underlying factors are much better compared to one year ago. “The market is trending up unevenly, with record high consumer buying power and sustained job gains giving buyers the confidence they need to get into the market,” he said. “Although relatively unusual, there will be rising demand for both rental space and homeownership this year. The great suppression in household formation during the past four years was unsustainable, and a pent-up demand could burst forth from the improving economy.”

Even if the current state of affairs--technicals and tradeflow considerations driving trade much more than news and events-- has us resigned to more of a "wait, watch, and react" strategy, at least there are some small opportunities for joy and sanity when we can observe bond markets rally the entire first hour of trading; something they've not done since.... Well, we're not exactly sure the last time 10yr yields were 2bps lower in the first hour of the day, but it hasn't happened since the sell off began last week. Cue the frustration... a perfect range trade. Overnight levels prodded yesterday's highs, never quite reaching the 2.399 high yields, but repeatedly bouncing at 2.38+. While supportive ceilings for yields are comforting, turnabout it fair play. After this morning's delightful little romp lower in yield, 10's are hitting resistance precisely at yesterday's low yields around 2.335. This isn't to say that we're doomed to not break through this range, but simply that we've seen an exceptional amount of sideways grind this morning. That being the case--as opposed to any discernible attempt to break lower--is, for lack of a better term, frustrating, as it continues to drive the point home of "no free lunches" for an easy bounce back toward last week's trading levels. In other words, the new, higher yield range is constantly seeing reinforcement. The more it sees, the more it's likely to see. For their part, MBS are doing OK...not quite back at yesterday mornings highs at 102-03, but fairly close at 101-31+. Bernanke Q&A looks like the best event-based opportunity for a range break this AM, at least as far as scheduled data is concerned. He speaks at 930 and Existing Home Sales reports at 10am.