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

By: Matthew Graham
MBS Live: MBS Morning Market Summary
As can be seen in the alerts below, bond markets initially improved during ECB Pres Mario Draghi's press conference, but took a turn for the worse and haven't really looked back since.  The damage is more subdued in MBS, where 104-23 to 104-24 has held up fairly well.  10yr yields, on the other hand are nearly 6 bps higher on the day at 1.62+.  This is a clear breakout "test" of the 1.60 pivot seen in the chart below, and a potential suggestion to test the next higher pivot at 1.65.  MBS likely wouldn't be interested in weathering such a move as gracefully as they are the current bout of selling.

MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
FNMA 3.5
104-24 : -0-03
FNMA 4.0
106-05 : -0-02
FNMA 4.5
107-00 : -0-02
FNMA 5.0
108-05 : -0-01
GNMA 3.5
106-19 : -0-04
GNMA 4.0
108-30 : -0-02
GNMA 4.5
109-16 : -0-02
GNMA 5.0
110-11 : -0-01
FHLMC 3.5
104-17 : -0-03
FHLMC 4.0
105-24 : -0-03
FHLMC 4.5
106-15 : -0-03
FHLMC 5.0
107-13 : -0-02
Pricing as of 11:07 AM EST
Morning Reprice Alerts and Updates
Below is a recap of instant Reprice Alerts and updates issued via email and text alert to MBS Live subscribers this morning.

9:53AM  :  ALERT ISSUED: S&P, Bunds, Euro, Hammering Domestic Bond Markets. Complete Risk Reversal
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.
9:41AM  :  ALERT ISSUED: High Volatility Morning For Bond Markets; MBS Slightly Weaker
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.
9:09AM  :  Lockhart Says Fed May Ease If Economy Falters
(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.
8:40AM  :  ECON: Productivity And Costs Down More Than Expected
* 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.
Live Chat Featured Comments
A recap of the featured comments from the MBS Live Dashboard's Live Chat feature, utilized by hundreds of industry professionals each day.

Matthew Graham  :  "Bond markets taking a break from responding to Europe for a moment to focus on upside open for domestic stock markets"
Matthew Graham  :  "RTRS - DRAGHI-HAVE TO MAKE CHANGES TO ESM IF WANT IT TO BECOME A SHAREHOLDER IN BANKS "
Matthew Graham  :  "RTRS- DRAGHI-ALLOWING ESM TO RECAPITALISE BANKS WOULD BE GOOD IN SOME RESPECTS, BUT ESM BEING SHAREHOLDER IN BANKS CARRIES RISKS "
Matthew Graham  :  "RTRS- FED’S LOCKHART SAYS BAR TO FURTHER MONETARY EASING REMAINS HIGH BUT LEVEL OF CONCERN ABOUT THE ECONOMY HIGHER THAN AT LAST FOMC MEETING "
Matthew Graham  :  "1.232"
Andy Pada  :  "where is the bund?"
Matthew Graham  :  "Euro at new lows... taken out all of today's gains and halfway back into y'day's range"
David Z.  :  "Same here. If the Boxer Bill doesn't pass I hope they at least do what they can with another executive order soon"
john murphy  :  "NO DZ but my ear is on the rail. After Wisconsin pressure is on Admin to pull disenfranchised middle class"
Matthew Graham  :  "RTRS- DRAGHI- NOT ECB'S TASK TO PUSH GOVTS INTO ACCESSING EFSF OR NOT "
Matthew Graham  :  "There's a preview of FOMC press conferences as the year progresses. Bernanke will also say "ahem... we're looking at you congress." (again..)"
john murphy  :  "HARP III on the way?"
Jeff Anderson  :  "Give Draghi credit for using the Telling It Like It Is Method. "
Matthew Graham  :  "RTRS - DRAGHI-NO RIGHT FOR MON POL TO FILL OTHERS' LACK OF ACTION "
Matthew Graham  :  "I don't remember a good similar example from the Fed, but it seems significant for him to effectively say 'don't pay any attention to our forecasts because the data's been worse since then.'"
Brett Boyke  :  "Very little spin on those MG"
Matthew Graham  :  "Draghi seems a bit negative today"
Matthew Graham  :  "RTRS- DRAGHI-DATA THAT CAME AFTER FORECAST CUT OFF DATA HAS BEEN WEAK "
Matthew Graham  :  "RTRS- DRAGHI-INTERBANK MARKET IS DYSFUNCTIONAL "
Victor Burek  :  "been reading about extending Twist and the Fed doesnt have many short term treasuries left to sell"
Matthew Graham  :  "RTRS - LOCKHART SAYS EXTENDING OPERATION TWIST IS AN OPTION AVAILABLE TO THE FED "
Matthew Graham  :  "RTRS - DRAGHI-INCREASED DOWNSIDE RISKS RELATE TO DEBT TROUBLES, POTENTIAL TO SPILL OVER TO ECONOMY "
Matthew Graham  :  "RTRS - DRAGHI-TO CONTINUE UNLIMITED LIQUIDITY FOR 1 MONTH OPERATIONS, FOR AS LONG AS NEEDED "
Matthew Graham  :  "RTRS - DRAGHI - ECB TO EXTEND LIMIT-FREE LIQUIDITY AT ITS REGULAR REFINANCING OPERATIONS UNTIL AT LEAST END OF 12TH MAINTENANCE PERIOD IN 2012 "
Matthew Graham  :  "RTRS- DRAGHI-INCREASED DOWNSIDE RISKS TO ECONOMIC OUTLOOK "
Matthew Graham  :  "RTRS - ECB'S DRAGHI BEGINS NEWS CONFERENCE AFTER ECB HOLDS BENCHMARK INTEREST RATE AT 1.0 PCT "
Matthew Graham  :  "RTRS - U.S. Q1 NON-FARM PRODUCTIVITY DECLINE BIGGEST IN ONE YEAR "
Matthew Graham  :  "RTRS- U.S. Q1 NON-FARM UNIT LABOR COSTS REVISED TO +1.3 PCT (CONSENSUS +2.2 PCT), PREV +2.0 PCT "
Matthew Graham  :  "RTRS - U.S. Q1 NON-FARM PRODUCTIVITY REVISED TO -0.9 PCT (CONSENSUS -0.7 PCT), PREV -0.5 PCT "
Patrick Waldron  :  "ECB meeting starts in 2 minutes. Things are gonna get choppy here one way or the other."
Christopher Stevens  :  "10YR must be expecting big things from the ECB"

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