MBS MID-DAY: Holding Gains Fairly Well After Earlier Volatility

MBS Pricing Snapshot

Overnight news that House wouldn't even vote on the "Plan B" tax and spending bill sent equities markets into a tailspin and helped 10yr yields make a run toward their recent 1.75 technical boundary (currently shared with the 200-day moving average). 10's actually broke through and made it 10 1.737 by 9am but bounced higher following a recent press conference with Speaker Boehner and Majority Leader Cantor.

That was the latest in a series of market movements that showed a disregard for economic data in favor of Fiscal Cliff headlines and year-end positioning. Earlier in the morning, a big block trade in 10yr futures hit 5 minutes BEFORE economic. These aren't Vegas-style "bets" ahead of an event, but rather a response to overnight news, or the covering of a short position taken out in early December or mid November when yields were in the high 1.5's.

Further to the point of "bigger fish to fry," this morning's economic data was unanimously better-than-expected, yet bond markets extended gains--not their standard move following stronger data. However, there was perhaps a brief pause for consideration. MBS opened at 104-18 and moved up to 104-22 by the time data hit. There was some back and forth just after 8:30am data, but they kept on improving to 104-26 before bond markets rand out of steam at 9am.

After some well-contained drifting ahead of Consumer Sentiment data and the Boehner/Cantor press conference, stock prices and bond yields began rising together. This took Fannie 3.0s back down to 104-20, but they've since recovered to 104-22. Bottom line, we're about half way between opening levels and the highs of the morning, with opening levels themselves having fallen in line with yesterday's highs. Early rate sheets are in line with the highs of the day, so extra caution is required there, but thankfully, 104-19 / 104-20 is emerging as a good intraday technical support level, and this could serve as a good line in the sand for any reprice risk that emerges later in the day.

- Durable Goods Orders +0.7 vs +0.2 Consensus

New orders for manufactured durable goods in November increased $1.6 billion or 0.7 percent to $220.9 billion, the U.S. Census Bureau announced today. This increase, up six of the last seven months, followed a 1.1 percent October increase. Excluding transportation, new orders increased 1.6 percent. Excluding defense, new orders increased 0.8 percent.

Machinery, up three consecutive months, had the largest increase, $1.0 billion or 3.3 percent to $32.0 billion.

Revised seasonally adjusted October figures for all manufacturing industries were: new orders, $478.9 billion (revised from $477.6 billion); shipments, $483.2 billion (revised from $482.3 billion); unfilled orders, $983.4 billion (revised from $982.9 billion); and total inventories, $615.3 billion (revised from $616.0 billion).

Personal income increased $85.8 billion, or 0.6 percent, and disposable personal income (DPI) increased $74.7 billion, or 0.6 percent, in November, according to the Bureau of Economic Analysis. - Income +0.6 vs +0.3 consensus
- Core PCE Prices 0.0 vs +0.1 consensus
- Consumer Spending +0.4 vs +0.3 consensus, -0.1 previously

Personal consumption expenditures (PCE) increased $41.3 billion, or 0.4 percent. In October, personal income increased $7.5 billion, or 0.1 percent, DPI increased $6.4 billion, or 0.1 percent, and PCE decreased $6.6 billion, or 0.1 percent, based on revised estimates.

Real disposable income increased 0.8 percent in November, in contrast to a decrease of 0.1 percent in October. Real PCE increased 0.6 percent, in contrast to a decrease of 0.2 percent.

Personal outlays -- PCE, personal interest payments, and personal current transfer payments -- increased $42.6 billion in November, in contrast to a decrease of $5.3 billion in October. PCE increased $41.3 billion, in contrast to a decrease of $6.6 billion.