MBS RECAP: Uneventful Session Deposits MBS At All-Tim Highs

MBS Pricing Snapshot

Overall Consumer Credit grew by $17.12 bln in May vs a revised $9.95 bln in April. The gain was the largest in five months and well above the Markets' expectations of $8.5 bln.

Revolving credit led the charge rising 11.2 % although non-revolving credit also grew, just at a slower pace of 6.5%. Revolving credit accounted for $870.2 bln of the total outstanding while non-revolving accounted for $1702.6 bln.

Any discernible market reaction occurred briefly, and mainly in equities. After a brief pop of volume in Treasuries, bond markets continue on at similar levels to before the report. This is usually the case for Consumer Credit releases and indeed for most economic reports that cover time periods more than a month into the past--veritable ancient history in the present economy.

The fed stands ready for QE3. This has been the message from 3 out of 3 Fed speakers so far today. Echoing similar sentiments from Rosengren and Evans, San Francisco Fed President John Williams further clarified the standard-issue "stands ready" verbiage, adding

“If further action is called for, the most effective tool would be additional purchases of longer-maturity securities, including agency mortgage-backed securities."

Despite the assertion that the Fed is ready to act, Williams noted that the Fed is currently falling short on both its mandates and that the recent extension of Operation Twist will have a "relatively modest impact."

Of particular interest in this speech is the extent to which Williams leaned on Europe as major consideration for the domestic economy. On the one hand, he noted that Europe is the "most important wild card for the US Economy," but also said that the European crisis is spreading, and cannot be solved by fiscal austerity.

This seems to us like an explicit statement that "things are bad" and getting worse, with the only slightly less explicit conclusion of Fed QE3 as the next logical step for the domestic economy.

Bond markets improved slightly on the release of the speech and MBS peeked into new all-time highs for a few trades and are currently in line with Friday's highs of 103-16 in Fannie 3.0s. 10yr yields have broken through overnight lows at 1.513 and are currently at 1.512.

Some of the "early crowd" may consider a positive reprice here, but we'd generally expect more muted responses to gains on the day before the Class A roll.