MBS MID-DAY: Holding Gains After Morning Volatility

MBS Pricing Snapshot

Much like yesterday, MBS hit highs around the time of day that many lenders send out their first rate sheets. This sets the stage for dome defensiveness going forward, especially if it looks like bond markets will continue to bounce from 10am levels.

This isn't to say that a negative reprice is an imminent risk, but we are already 5 ticks down from the 104-24 highs at 104-19. If the move up to those highs hadn't been somewhat precipitous around 9am, we'd probably be more concerned about reprices.

That said, we're already marginally concerned and will continue to be more concerned to whatever extent prices fall below 104-19 from here on out, with the most serious support level "line in the sand" at the 104-17 lows of the morning.

To rephrase, breaking below 104-19 is a moderate risk, and breaking below 104-17 is a bigger risk.

- Business Conditions rose to -1.9 from -7.1
- Consensus was -4.0, -1.9 is highest since April
- Six-month outlook up huge from 12.5 to 41.2
- New orders turn positive from -5.5 last month to +1.0
- The only major bond-market-friendly component of the report was the Employment index which fell to -7.3 vs +8.6 last month

From the Philly Fed:
Firms responding to the September Business Outlook Survey reported nearly flat business activity this month. The survey’s indicators for general activity and new orders both improved from last month but recorded levels near zero. Firms reported continuing declines in shipments, employment, and hours worked. Indicators for the firms’ expectations over the next six months, however, improved notably this month, although the same firms forecast continued deceleration in production growth in the fourth quarter.

30-year fixed-rate mortgage (FRM) averaged 3.49 percent with an average 0.6 point for the week ending September 20, 2012, down from last week when it averaged 3.55 percent. Last year at this time, the 30-year FRM averaged 4.09 percent.

15-year FRM this week averaged 2.77 percent with an average 0.6 point, down from last week when it averaged 2.85 percent. A year ago at this time, the 15-year FRM averaged 3.29 percent.

5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.76 percent this week with an average 0.6 point, up from last week when it averaged 2.72 percent. A year ago, the 5-year ARM averaged 3.02 percent.

1-year Treasury-indexed ARM averaged 2.61 percent this week with an average 0.4 point, the same as last week. At this time last year, the 1-year ARM averaged 2.82 percent.

Although we're slightly off the best levels of the overnight sessions, the morning has generally been positive for MBS and Treasuries. 10yr yields began falling right at the start of the Asian session, helped along by weak data out of Japan and China. Markit's PMI for the entire Eurozone fell to it's lowest level since mid 2009, which offered no roadblock to German Bund yields moves lower.

10's traded in a range from the high 1.72's to the mid 1.75's overnight and walked in the door around 1.74, which is where they currently trade after a bit of choppiness. Fannie 3.0 MBS opened very close to all-time highs (104-22 vs 104-25) and actually got within 1 tick around 9am.

Jobless Claims were slightly higher than expected at 382k vs 375k and Markit's PMI for the US came in both in-line with expectations and unchanged from the previous month.

The last meaningful data for the day and week arrives at 10am with the Philly Fed Index. As per usual, we're interested not only in the headline, but also (and perhaps even more so) in the employment component.

Fannie 3.0 MBS have been a bit choppy this morning and are now up close to opening levels, currently 104-22 after dipping as low as 104-17 around 9:20am. Broader bond market volume has been the best of the week and if it continues along with these gains, positive trends mentioned in "The Day Ahead" will be reinforced.

-Average PMI reading for third quarter as a whole lowest since Q3 2009

ƒ -Slowest rise in output for three years in September

ƒ -Modest increase in employment

ƒ -Input price inflation at four-month high, but still much weaker than at start of 2012

The Markit Flash U.S. Manufacturing Purchasing Managers’ Index (PMI) was unchanged at 51.5 in September, indicating only a modest improvement in U.S. manufacturing business conditions. The preliminary ‘flash’ PMI reading, which is based on around 85% of usual monthly replies, remained only fractionally higher than the near three-year low recorded in June.

PMI index readings above 50.0 signal an increase or improvement on the prior month, while readings below 50.0 indicate a decrease.

The PMI averaged 51.5 in the three months to September, down from 54.2 in the three months to June, pointing to the weakest quarterly performance since Q3 2009. Manufacturers reported a further rise in output during September, though growth was only marginal and the weakest for three years.

- Claims 382k vs 375k consensus
- 4 week average up to 377,750 from 375,750
- As is typically the case, claims "fell" from the previous week only because the previous week was revised higher.

In the week ending September 8, the advance figure for seasonally adjusted initial claims was 382,000, an increase of 15,000 from the previous week's revised figure of 367,000. The 4-week moving average was 375,000, an increase of 3,250 from the previous week's revised average of 371,750.

The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending September 1, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending September 1 was 3,283,000, a decrease of 49,000 from the preceding week's revised level of 3,332,000. The 4-week moving average was 3,316,500, a decrease of 7,500 from the preceding week's revised average of 3,324,000.