MBS MID-DAY: Firm Resistance To Further Gains

MBS Pricing Snapshot

"Rally and Fade..." That has been the default response in bond markets to the two most recent pieces of market moving data. Beginning in the overnight session, 10yr yields rallied into the 1.8's on two notch S&P downgrade of Spain only to bounce back to open domestically around 1.94%.

The next instance of "rally and fade" follows this morning's slightly weaker-than-expected GDP result. This one is a bit less extreme as 10's only made it into the high 1.92's before turning around, currently in the 1.95's.

MBS have been in a very narrow range for two days and thus far are drawing on support from yesterday afternoon's lows at 103-18. They'd been as high as 103-22 this morning (Fannie 3.5's). Truth be told, we'd rather get this weakness out of the way before rather get this weakness out of the day before rate sheets hit en masse, and hope for a lift after Consumer Sentiment at 9:55am. It looks like bond markets are delaying their final verdict until after that data.

Even then, their verdict has increasingly been "sideways." Even after the FOMC data on Wednesday that stood the best chance to change that sideways mentality, and even after this morning's GDP offered the next best opportunity for a directional break, we're STILL seeing more sideways motivation (i.e. things started to rally, but corrected back to the range) than anything. So the aforementioned "verdict" could simply be "more sideways." We're wondering if this won't continue to be the case to some extent, all the way until next Friday's NFP.

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.2 percent in the first quarter of 2012 (that is, from the fourth quarter to the first quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter of 2011, real GDP increased 3.0 percent.

The Bureau emphasized that the first-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 3). The "second" estimate for the first quarter, based on more complete data, will be released on May 31, 2012.

The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, and residential fixed investment that were partly offset by negative contributions from federal government spending, nonresidential fixed investment, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP in the first quarter primarily reflected a deceleration in private inventory investment and a downturn in nonresidential fixed investment that were partly offset by accelerations in PCE and in exports.