MBS MID-DAY: In Positive Territory, But Weaker After Fiscal Cliff Headlines

MBS Pricing Snapshot

Bond markets and especially equities markets continue to show an increasing tendency to whip around on any and all headlines pertaining to the Fiscal Cliff. In rapid succession this morning, we've had Erskin Bowles, John Boehner, and Orrin Hatch out with 'Cliffy' comments (negative, positive, positive, respectively).

The Bowles' comments flew somewhat under the radar as they made rounds at the same time that the New Home Sales data was released, but definitely added to the stock market's swoon. Shortly thereafter, Boehner spoke optimistically, and stocks rallied in spite of the absence of any new information. Treasuries and MBS began to give up some ground at that point and have recently been nudged into slightly weaker territory after additional comments from Utah's Hatch indicating a 'mere' $23 bln gap separating republicans and democrats over the Fiscal Cliff.

Fannie 3.0s are now benefiting from a sideways momentum that earlier had them underperforming Treasuries. As these headlines hit, MBS have been better able to hold sideways versus the more volatile response in Treasuries (most volatile in stocks! Over 10 points trough to peak on Cliff comments alone!).

Even so, MBS have been pushed to within a few ticks of their weakest levels of the morning, currently 105-08 (earlier low was 105-06). With the Fed's scheduled Twist buying set to conclude at 11am and Obama scheduled to speak at 11:35am, it makes sense to stay vigilant/guarded again the prospect of additional volatility in the next hour.

- 368k unit annual rate vs 390k consensus
- Last month revised to 369k from 389k
- Northeast region -32.3 pct, midwest up record 62.2 pct
- Commerce dept says 'minimal effect' from Hurricane
- Gigantic margin of error ±18.3 pct on the monthly change

Sales of new single-family houses in October 2012 were at a seasonally adjusted annual rate of 368,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 0.3 percent (±18.3%)* below the revised September rate of 369,000, but is 17.2 percent (±21.2%)* above the October 2011 estimate of 314,000.

The median sales price of new houses sold in October 2012 was $237,700; the average sales price was $278,900. The seasonally adjusted estimate of new houses for sale at the end of October was 147,000. This represents a supply of 4.8 months at the current sales rate.

US Treasuries hit the Asian open at Tuesday's best levels after comments from Senate Majority Leader Reid continued to provide a "risk-off" bid. 10's began rallying steadily into the European session with 10's moving from 1.64 to just under 1.61 at the US open. European markets eventually got on board with the Treasury rally, but the fact that it was Treasury-led, seems to suggest more underlying focus on domestic issues, where the Fiscal Cliff is currently the 800-lb gorilla.

There are, however, no "scheduled releases" of Fiscal Cliff information, so the constant sense of "waiting" has markets a bit nervous. We're now into trading levels in Treasuries that discount almost all the recent positivity over the Greece deal. 10yr yields have moved back to the bottom of their two month range while the Euro is still slightly higher than the midpoint of its range over the same time.

In such "risk-off" moves, Treasuries typically benefit more readily than MBS. That's the case this morning as Fannie 3.0s trade 4 ticks higher at the moment (105-08) while 10yr TSYs are 10 ticks higher in price (comparing price to price isn't always a reliable indicator of relative performance, but in today's case, we'd note that spreads are indeed a few bps wider, confirming the Treasury outperformance).

Still, most of the directional gains were in the overnight session and while Treasuries maintain a bit of that positive momentum, they've taken a decidedly sideways step since 9am and haven't extended into better territory despite a weak open for US stock markets. MBS are even more decidedly sideways in a tight range between 105-07 and 105-10. We haven't had any economic data yet this morning, apart from the weekly Mortgage Applications data early this morning. 'New Home Sales' is coming up at 10am followed by Fed Twist buying from 10:15-11:00 and the 5yr Treasury Auction at 1pm. President Obama is also scheduled to speak at 11:35am ET.