MBS MID-DAY: Persistently Weaker With Or Without Econ Data

MBS Pricing Snapshot

The extent to which there's any real risk of negative reprices this early in the day largely depends on the time frame of your initial rate sheet. Additionally, we've just sort of been hovering a few ticks weaker than the morning's previous lows with Fannie 3.0's down now to 103-04 after finding some short term support earlier at 103-07.

So the possibility of negative reprices could be increasing for some lenders who priced earlier in the morning and also to whatever extent the selling maintains momentum. Breaking the recent low of 103-04 would increase risks more broadly.

10's are currently up to 1.6643 and Fannie 3.0s are holding 103-04 for now.

Pending home sales rose in July to the highest level in over two years and remain well above year-ago levels, according to the National Association of Realtors®.

The Pending Home Sales Index,* a forward-looking indicator based on contract signings, rose 2.4 percent to 101.7 in July from 99.3 in June and is 12.4 percent above July 2011 when it was 90.5. The data reflect contracts but not closings.

Lawrence Yun , NAR chief economist, said the index is at the highest level since April 2010, which was shortly before the closing deadline for the home buyer tax credit. "While the month-to-month movement has been uneven, more importantly we now have 15 consecutive months of year-over-year gains in contract activity," Yun said.

Limited inventory is constraining market activity. "All regions saw monthly increases in home-buying activity except for the West, which is now experiencing an acute inventory shortage," Yun added.

10yr Treasuries traded into slightly weaker at the outset overnight as Asian accounts booked profits and/or set up for today's 5yr Note auction. The weakness was contained by yesterday's high yields, however, and bounced back into the European session only to be contained on the other side of the spectrum by yesterday's low yields. So it was a fairly uneventful, if choppy range trade overnight.

Things have weakened just slightly following the 830am GDP release, but not necessarily DUE to the GDP release. Coming in at an as-expected +1.7% really does nothing for either side of the equation and any weakness we're seeing is either incidental, based on the "sideways week ahead of more significant events" principle, or most likely, has to do with Merkel/Monti headlines emerging from their meeting roughly 5 minutes after GDP.

Merkel was not much more enthusiastic than she normally is, saying that she's convinced Italian reforms will bear fruit and convinced about the need for moor coordination within the Euro zone. Monti similarly noted that Italian reform progress is beginning to be recognized by markets, but the last little push to the morning's weakest levels thus far came after Merkel noted the likelihood of narrowing debt spreads for Italy as a result of the reforms.

Yes Angela, there's the reforms and also the ECB's tacit yield-targeting program that may or may not exist. So this is nothing new really. European leaders patting each other on the back and saying that things will get better because positive changes are being made and bond markets pay some brief, relatively low volume homage to the political posturing.

We'd have a significantly easier time believing that this morning's weakness is a well-timed bounce at the bullish end of the recent range. After all, we've been on a range about how we expected things to move mostly sideways after noting some sort of equilibrium around a 1.63 level in 10yr yields. So with that level being broken slightly yesterday, time to see some resistance to further gains then, right? What better time than after the week's first major data release, ostensibly interesting Euro headlines, and with the ability to be further disguised as a concession for this afternoon's 5yr Note Auction.

The weakness is nominal so far with 10yr yields hovering around 1.65 since about 8:45 and Fannie 3.6's trading sideways between 103-07 and 103-08. Next data at 10am with Pending Home Sales.

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 1.7 percent in the second quarter of 2012 (that is, from the first quarter to the second quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 2.0 percent.

The GDP estimate released today is based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, the increase in real GDP was 1.5 percent (see "Revisions" on page 3).

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

The deceleration in real GDP in the second quarter primarily reflected decelerations in PCE, in nonresidential fixed investment, and in residential fixed investment that were partly offset by a smaller decrease in federal government spending, an acceleration in exports, and a smaller decrease in private inventory investment.