MBS MID-DAY: Defending Weakest Levels After Opening Higher

MBS Pricing Snapshot

As expected, this morning's reading on Consumer Confidence has packed the most market-moving punch. This might not have necessarily been the case had it not been for the relatively big beat.

Expectations among surveyed economists saw today's confidence headline at 63.0, but the actual index printed at 70.3, its highest level since February. The report's internals were similarly better-than-expected.

Stocks advanced to the highest levels of the morning and 10yr yields shed a quick 1.5 bps moving from 1.71 to 1.725 following the report. MBS fell a few ticks but haven't yet broken through the morning's lows. Volume has picked up by at the moderate pace we'd expected from the moderate increase in the pace data and events.

If anything, we're pleasantly surprised at the moment, by the resilience in bond markets after the strong Consumer Confidence print. This is our first major opportunity this week to observe the level of connection between trading levels and economic data. The fact that we're not seeing as much as we would have expected can mean a couple things. Take your pick:

• Markets' focus is elsewhere, perhaps more concerned with a recent pick up in European concern over Spain's bailout, Greece's €10 bln, no €20 bln, no, wait, €30 bln deficit, and last night's "revelation" that the Bundesbank will put the OMT through the same ringer it had set up in its dungeon for the ESM.
• Today's scheduled Fed buyback begins now so maybe bond markets are simply doing their best to keep prices as high as possible before uncle money bags swings through the store and clears the shelves.
• Consumer confidence doesn't speak much to the employment situation and the Fed has recently been on even more of a rampage in clearly singling out employment as the key condition governing the ebb and flow of further QE.

Whatever the case, bond markets are getting somewhat choppier here. That said, MBS are 4 ticks in the green whereas Treasuries are in slightly weaker territory. As is frequently the case, we could see our next noticeable dose of volatility following the 11:02am details of the Fed's Twist buying.

1.725 is the line in the sand for 10yr yields and 105-13 for Fannie 3.0 MBS. If MBS are moving weaker below 105-13, negative reprice risk would be increasing. As of now, we're simply laying these levels out there for potential future consideration.

U.S. house prices rose 0.2 percent on a seasonally adjusted basis from June to July, according to the Federal Housing Finance Agency’s monthly House Price Index. The previously reported 0.7 percent increase in June was revised downward to a 0.6 percent increase. For the 12 months ending in July, U.S. prices rose 3.7 percent. The U.S. index is 16.4 percent below its April 2007 peak and is roughly the same as the June 2004 index level.

FHFA uses the purchase price of houses with mortgages owned or guaranteed by Fannie Mae or Freddie Mac to calculate the monthly index. For the nine census divisions, seasonally adjusted monthly price changes from June to July ranged from -0.8 percent in the East South Central division to +1.3 percent in the Mountain division while the 12-month changes ranged from -1.4 percent in the Middle Atlantic division to +11.9 percent in the Mountain division.

- Confidence +70.3 vs +60.3 consensus
- present situation +50.2 vs +46.5 previous
- expectations +83.7 vs 71.1 previous
- Highest headline and expectations since February.

The Conference Board Consumer Confidence Index®, which had declined in August, improved in September. The Index now stands at 70.3 (1985=100), up from 61.3 in August. The Expectations Index increased to 83.7 from 71.1. The Present Situation Index rose to 50.2 from 46.5 last month.

The monthly Consumer Confidence Survey®, based on a probability-design random sample, is conducted for The Conference Board by Nielsen, a leading global provider of information and analytics around what consumers buy and watch. The cutoff date for the preliminary results was September 13.

Says Lynn Franco, Director of Economic Indicators at The Conference Board: “The Consumer Confidence Index rebounded in September and is back to levels seen earlier this year (71.6 in February 2012). Consumers were more positive in their assessment of current conditions, in particular the job market, and considerably more optimistic about the short-term outlook for business conditions, employment and their financial situation. Despite continuing economic uncertainty, consumers are slightly more optimistic than they have been in several months.”

Bond markets began the overnight session drifting into slightly stronger territory, helped along by news that Greece may request a refinance of its debt held by the ECB in order to plug a short term budget gap. Also facilitating the "risk-off" sentiment was news that the Bundesbank will be scrutinizing the legality of the recently announced ECB bond-buying program, much the same as they scrutinized the legality of the ESM.

The biggest mover overnight, however, was a relatively weaker Spanish debt auction. It wasn't responsible for dramatic movement, but it was good for a few bps lower in German Bunds and US Treasuries. Moreover, once the improvements ran their course, bond markets began moving in the other direction, particularly at the domestic open where traders were lined up to sell the 10yr's dip under 1.70.

So even though bond markets crossed the threshold of this morning's open in better territory, they'd been weakening since 6am. Domestic traders were lined up to sell the break into the 1.6's in 10yr yields, the first time we've seen yields that low since earlier in the month.

But the selling has been limited so far, stopping short of carrying yields above yesterday's close. 10's bounced at 1.716 and currently trade at 1.7094. MBS similarly bounced very near yesterday's highest levels after opening significantly higher. Fannie 3.0s were 105-18 at the open, fell to 105-13 and have now returned to 105-17 after the supportive bounce.

Case Shiller Home Price data came out at 9am and didn't have much of an impact on trading levels. 10am brings another report on home prices from FHFA and the relatively more significant Consumer Confidence report expected to show an improvement from 60.6 to 63.0.

Average home prices increased by 1.5% for the 10-City Composite and by 1.6% for the 20-City Composite in July versus June 2012. For the third consecutive month, all 20 cities and both Composites recorded positive monthly changes. It would have been a fourth had prices not fallen by 0.6% in Detroit back in April.

The 10- and 20-City Composites posted annual returns of +0.6% and +1.2% in July 2012, up from their unchanged and +0.6% annual rates posted for June 2012. Fifteen of the 20 MSAs and both Composites posted better annual returns in July as compared to June 2012. Dallas and Washington D.C. saw no change in their annual rates; and Cleveland, Detroit and New York saw their rates worsen in July, with respective returns of +0.4%, +6.2% and -2.6%. After nine consecutive months of double digit annual declines, Atlanta finally improved to a -9.9% annual rate in July 2012, but still the worst among the 20 cities followed by S&P Dow Jones Indices.