MBS MID-DAY: Selling-Off After Early Head-Fake Rally

MBS Pricing Snapshot

German Bunds are up from 1.224 to 1.295 in the space of an hour. The Euro decidedly bottomed out near the end of Draghi's press conference, and the cash open for stocks was unexpectedly strong. All of the above has weight heavily on bond markets this morning, with 10yr TSY yields up to 1.6184--a real danger zone in terms of momentum if we don't bounce lower, quickly. Fannie 3.5 MBS are down 3 ticks at the moment at 104-24 and 3.0's are down 5 ticks at 102-09.

Bond markets continued to weaken overnight with 10yr yields eventually testing the 1.61+ pivot from May 30/31. It was suspected, but soon became blatantly clear that markets were waiting on ECB Pres Draghi's 8:30am press conference.

10's had already firmed up a bit just before the domestic open and were near 1.60 when the press conference began. They soon fell to the mid 1.55's as Draghi generally erred toward 'negative' and perhaps even a little 'dire.' At the same time, Fed's Lockhart was out saying that more easing is a possibility for the upcoming announcement.

Treasuries had been absolutely glued to German Bunds since about 4:40AM when each hit their high yields of the session. Bund yields fell as Draghi answered questions, with domestic Treasuries following. Bunds bounced off an important pivot point at 1.224 and moved higher as the bulk of the Draghi-inspired rally seemed to have topped out (or bottomed out in the case of yields).

All of the above brough 10yr yields to 1.57 and MBS to break-even levels before the domestic stock market open. But stocks opened up stronger, pulling bond yields up sharply and hitting MBS for 2-3 ticks.

Fannie 3.5's are currently down 2 ticks at 104-25 and 3.0's are down 4 ticks at 102-11. 10yr yields are at 1.593.

(Reuters) - The Federal Reserve may need to consider further monetary easing if a wobbly economy falters or Europe's crisis triggers a broader financial shock, Atlanta Fed President Dennis Lockhart said on Wednesday.

Lockhart was speaking just days after data for May showed a sharp slowdown in employment growth. Economic growth in the first quarter was also revised down to 1.9 percent from 2.2 percent, raising fears that the expansion might peter out.

"It is my sense that material risks to the outlook are gathering," Lockhart told business executives at The Broward Workshop.

"Should it become clear that something resembling my baseline scenario of continued, though modest, growth is no longer realistic, further monetary actions to support the recovery will certainly need to be considered," he said.

* Productivity -0.9 vs -0.7 consensus
* Labor costs +1.3 vs +2.2 consensus
* Bigger market mover of the morning is ECB Press Conference

Nonfarm business sector labor productivity decreased at a 0.9 percent annual rate during the first quarter of 2012, the U.S. Bureau of Labor Statistics reported today. The decline in productivity reflects increases of 2.4 percent in output and 3.3 percent in hours worked. (All quarterly percent changes in this release are seasonally adjusted annual rates.) From the first quarter of 2011 to the first quarter of 2012, productivity increased 0.4 percent as output and hours worked rose 2.7 percent and 2.2 percent, respectively.

Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors, and unpaid family workers. The measures released today are based on more recent source data than were available for the preliminary report.

Unit labor costs in nonfarm businesses increased 1.3 percent in the first quarter of 2012, while hourly compensation increased 0.4 percent. Unit labor costs rose 0.9 percent over the last four quarters.

BLS defines unit labor costs as the ratio of hourly compensation to labor productivity; increases in hourly compensation tend to increase unit labor costs and increases in output per hour tend to reduce them.