MBS MID-DAY: Moderate Weakness Though Prices Relatively Contained

MBS Pricing Snapshot

Treasury yields and equities futures kicked off the overnight session in their highest territory, ostensibly due, in part to news of a Fiscal Cliff proposal over the weekend. While it was rejected by the White House, it did still signifiy some level of progress in the ongoing negotiations. But the real market mover during Asia's opening hours was the election in Japan, which saw the LDP party score a landslide victory in elections over the weekend. Risk markets rallied on the implication that the elections put the stimulus-friendly Shinzo Abe back in the Prime Minister seat.

As is frequently the case, the onset of the European session brought a shift in tone, this time in a positive direction for bond markets. The move wasn't huge, but was good enough to get 10yr yields down from 1.734 highs to 1.714 lows.

10's made it to the domestic session near those lows and MBS opened roughly a tick weaker than Friday's latest levels. Since then, the morning trade has been choppy and without much regard for economic data. If anything, Empire State Manufacturing took a bit of a bite out of equities futures and helped bond markets hold their ground. But the cash open saw equities move higher, which pressured bond markets back to their weakest levels of the overnight session.

If the current highs and lows marked the absolute boundaries of the session, it would be an incredibly sideways and boring day. There's no remaining economic data, though there are two Fed speakers as well as "Twist" buying from 10:15-11:00am in the 8year range.

MBS, specifically, are holding up a bit better than Treasuries at the moment, but even the latter may be attempting to establish some technical support in the mid 1.72's despite advancing stocks. Fannie 3.0's are nearer their highs of the morning, down only 2 ticks at 104-21, but trading has been sparse so far.

- Outflow in Oct, $56.7 bln vs $4.3 bln Inflow in Sep
- $1.3 bln Inflow in Longer Maturities, Excluding Swaps
- Net purchases of Bonds/Notes $15.8 bln
- China/Japan Holdings moderately increased
- This data series isn't a major market mover for bond markets, speaking more to long term trends in buying/selling of US Treasuries among foreign investors

-The sum total in October of all net foreign acquisitions of long-term securities, short-term U.S. securities, and banking flows was a monthly net TIC outflow of $56.7 billion. Of this, net foreign private outflows were $56.4 billion, and net foreign official outflows were $0.3 billion.

Foreign residents increased their holdings of long-term U.S. securities in October – net purchases were $28.4 billion. Net purchases by private foreign investors were $22.3 billion, and net purchases by foreign official institutions were $6.2 billion.

At the same time, U.S. residents increased their holdings of long-term foreign securities, with net purchases of $27.1 billion.

Taking into account transactions in both foreign and U.S. securities, the net foreign purchases of long-term securities were $1.3 billion. After including adjustments, such as estimates of unrecorded principal payments to foreigners on U.S. asset-backed securities, the overall net foreign acquisition of long-term securities is estimated to have been negative $20.6 billion in October.

- Manufacturing Index -8.1 vs -1.0 Consensus, -5.22 Previous
- New Orders -3.7 vs +3.08 Previous

The December Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to decline at a modest pace. The general business conditions index was negative for a fifth consecutive month, falling three points to -8.1. The new orders index dropped to -3.7, while the shipments index declined six points to 8.8. At 16.1, the prices paid index indicated that input prices continued to rise at a moderate pace, while the prices received index fell five points to 1.1, suggesting that selling prices were flat. Employment indexes pointed to weaker labor market conditions, with the indexes for both number of employees and the average workweek registering values below zero for a second consecutive month. Indexes for the six-month outlook were generally higher than last month, although the level of optimism remained at a level well below that seen earlier this year.