MBS MID-DAY: Sideways Grind Continues In Spite Of Data, Headlines

MBS Pricing Snapshot

On the 2-day chart in Fannie 3.0's, the move from lows to highs between 9am and now looks a bit more dramatic than it actually is. Granted, we've seen a good pop in volume and decent surge in prices heading into the scheduled Fed buyback in 8-10 year maturities, but eh dramatic effect in MBS is largely due to the narrowness of the chart.

Fannie 3.0s are up 3 ticks on the day now at 103-26. This is only one tick higher than morning highs, but is more striking coming off the 9am lows around 103-20. Enough for positive reprices? We're probably not quite there yet, and in most cases, beholden to the time frames on initial rate sheets. If, however, we were to continue seeing pivot-based support around 103-24 to 103-25, chances of positive reprices would increase. Negative risk picks up under a 103-20 to 103-21 pivot point.

10yr yields are back to unchanged levels on the day vs 5pm and slightly better vs 3pm at 1.5738. Generally, everything continues to grind sideways ahead of bigger-ticket events.

The most tabloid-worthy market moving headline this morning claims to essentially leak the details of tomorrow's ECB Announcement and suggests sterilized, unlimited purchases in up to 3 year maturities. Those facts in and of themselves would not come as much of a surprise given that Draghi has said twice this week, that maturities up to 3 years are fair game within the framework of the Euro zone treaty. Nonetheless, it SOUNDED pretty serious and for a few minutes, 19 to be exact, markets took it seriously, with German Bunds rising from 1.40 to 1.43 in roughly 5 minutes, and falling back below 1.40 19 minutes after the news.

The much bigger deal this morning, and the one that has created the real weakness for bond markets was the relatively weak German Bund auction overnight. This doesn't really suggest anything beyond uncertainty ahead of bigger-ticket events over the next two days and weeks, but was certainly enough for a short term course correction, contributing to a 7bp move higher from lows to highs in German Bunds overnight.

Domestic bond markets have followed faithfully, but in a SIGNIFICANTLY lower magnitude. The same move that created 7bps of movement for Bunds was about half as big in US 10's. After the gyrations from the ECB head-fake, higher-than-expected productivity didn't help bond markets bounce back, even if it didn't create any big volume reaction.

Thus, we find ourselves a few ticks weaker in MBS, themselves following Treasuries in a lower magnitude just as Treasuries followed Bunds. We've traded a few ticks on either side of positive/negative this morning, but are currently down 3 ticks at 103-21 at the lows of the morning. 10yr yields are at their highs--1.594--as risk markets have moved higher in concert (Euro, peripheral debt prices, stocks, Bund yields, to name a few). Next major pivot for 10yr Treauries is at 1.61. Drifting higher between here and there would essentially be a non-event whereas crossing into that territory could coincide with bigger waves reaching MBS' shores.

- Q2 Productivity up 2.2 pct vs +1.8 pct consensus
- Unit Labor Costs +1.5 pct vs +1.5 pct consensus

Nonfarm business sector labor productivity increased at a 2.2 percent annual rate during the second quarter of 2012, the U.S. Bureau of Labor Statistics reported today. The increase in productivity reflects increases of 2.4 percent in output and 0.1 percent in hours worked. (All quarterly percent changes in this release are seasonally adjusted annual rates.) From the second quarter of 2011 to the second quarter of 2012, productivity increased 1.2 percent as output and hours worked rose 3.0 percent and 1.7 percent, respectively. (See table A.)

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 were based on more recent source data than were available for the preliminary report.

Unit labor costs in nonfarm businesses increased 1.5 percent in the second quarter of 2012, while hourly compensation increased 3.7 percent. Unit labor costs rose 0.9 percent over the last four quarters. (See table A.)

European Central Bank President Mario Draghi’s bond-buying proposal involves unlimited purchases of government debt that will be sterilized to assuage concerns about printing money, two central bank officials briefed on the plan said. Under the blueprint, which may be called “Monetary Outright Transactions,” the ECB would refrain from setting a public cap on yields, according to the people, and a third official, who spoke on condition of anonymity. The plan will only focus on government bonds rather than a broader range of assets and will target short-dated maturities of up to about three years, two of the people said. An ECB spokesman referred to an Aug. 20 statement in which the Frankfurt-based central bank said it was misleading to report on decisions that haven’t been taken yet.