MBS MID-DAY: On The Ropes In Slightly Weaker Territory

MBS Pricing Snapshot

A quick update to the previous alert.... Reprice risk is ebbing almost as fast as it flowed minutes ago as Fannie 3.0s have put int a decent supportive bounce in line with yesterday afternoon's lows. Perhaps even more heartening and more telling is the cue in 10yr yileds were today's topped out just now at 1.6607, precisely in line with two of the major lows for yesterday. This sort of classic "pivot bounce" does two things for us:

A) Let's us know that markets may indeed be tuning out for the day and simply trading technicals into the afternoon

and

B) Gives us a good "line in the sand" at which to adjust any additional reprice concerns.

In other words, while the moderate losses seen so far since 10am could be sufficient for a few lenders to reprice negatively, the bouncing here makes that slightly less likely and further sets up useful levels for assessing any further increase in reprice risk. If we continue to stay on the low side of 1.6607 or the high side of 103-06 in Fannie 3.0's, we're progressively more insulated from reprices.

Keep in mind that we could get another dose of volatility in a few minutes when the Fed selling results are in around 11:02am. Such fluctuations usually prove to be temporary, but can occasionally shift the directional trends on the day.

All we really have by way of market moving events is the fact that the scheduled Fed Twist selling is going on at the moment. the 10:15am start time on that seems to coincide with a recent weakening in bond market though we're also entertaining the possibility of a simple "stock lever" effect as stocks rally off their lows.

Causality is less important than the price action at this point. To that end, Fannie 3.0's are down 8 ticks from their highs of the morning, up 1 ticks on the day at 103-07. This is still in the "zone" of a long term pivot range from 103-07 to 103-11, but apart from being on the weaker side of that zone, is simply "enough movement" that we could see a negative reprice from a few of the "early crowd" lenders soon.

After Wednesday's FOMC Minutes, we've increasingly noted this vague "early September" time-frame as the next big thing for markets. Several of the big ticket events include an ECB policy announcement, the US Jobs report, and FOMC Announcement (with increasing possibilities of QE3 inclusion), and a German court ruling on the legality of the ESM, Europe's permanent bailout fund. The following article in Businessweek speaks to the latter and reinforces our recent assertion that markets may well be wondering how to pass the time between now and the early September events:

ECB Awaits German ESM Ruling Before Setting Bond Plan

European Central Bank President Mario Draghi may wait until Germany’s Constitutional Court rules on the legality of Europe’s permanent bailout fund before unveiling full details of his plan to buy government bonds, two central bank officials said.

With the court set to rule on Sept. 12, investors looking for Draghi to announce a definitive purchase program at his Sept. 6 press conference might be disappointed, according to the officials, who spoke on condition of anonymity because the deliberations are not public. The program is still being worked on and staff may not be able to finalize it by then, said the officials, who are familiar with thinking on the ECB Governing Council. An ECB spokesman in Frankfurt declined to comment.

Draghi announced on Aug. 2 that the ECB may intervene in the secondary market to reduce bond yields in countries such as Spain and Italy if they apply to Europe’s bailout fund for aid and accept the conditions attached. The European Stability Mechanism, intended to replace the temporary European Financial Stability Facility, hasn’t entered into force yet as legal wrangling over its compatibility with the German constitution continues.

While Draghi is likely to give a progress report on the bond plan after the Sept. 6 rate decision, the ultimate design of the ECB’s program may depend on the uncertainty over the permanent bailout fund being resolved, so the officials said it makes sense to wait for the German ESM court ruling.

The overnight session was largely uneventful with little by way of data or news out of Asia and Europe. Asian trading took 10yr yields gently higher to the 1.69% range before ebbing lower into the European session, ultimately hitting the US open a few bps lower than yesterday. MBS opened in line with yesterday's modal highs around 103-10.

The only relevant data of the morning, Durable Goods, had a paradoxical effect versus what its headline improvement would suggest. Whether it was the reports weak internals or simply a tacit vote of "not good enough" (in light of the FOMC's recent challenge to markets to demonstrate substantial and sustainable improvement), bond markets have rallied a few more ticks/bps following the report.

10's are now down in the high 1.63's and Fannie 3.0s are up 7 ticks on the day. Stock futures are leaking slightly lower ahead of the domestic stock open. There are no more significant pieces of data on the calendar for today.

* Durables beat big on the headline, but internals less bullish
* Largely transportation driven, Boeing orders noted
* Despite +4.2 headline, -0.5 excluding transportation

From the Census Bureau:
New orders for manufactured durable goods in June increased $3.4 billion or 1.6 percent to $221.6 billion, the U.S. Census Bureau announced today. This increase, up two consecutive months, followed a 1.6 percent May increase. Excluding transportation, new orders decreased 1.1 percent. Excluding defense, new orders decreased 0.7 percent.

Transportation equipment, up four of the last five months, had the largest increase, $5.1 billion or 8.0 percent to $68.8 billion.

From Reuters "Instant Views:"

DAVID ADER, HEAD OF GOVERNMENT BOND STRATEGY, CRT CAPITAL GROUP, STAMFORD, CONNECTICUT

"Bottom line is that the headline gain is all transport/aircraft driven but details are miserable with large downward revisions and the core particularly disturbing."