MBS MID-DAY: Off Highs, Holding Gains For Now

MBS Pricing Snapshot

- 4.92 mln annual rate, vs 5.01 mln consensus
- Last month revised from 4.98 mln to 4.95 mln
- Inventory of homes for sale 1.93 mln / 4.7 months
- 21 percent of existing sales were distressed vs 25 percent previously; lowest on record

Lawrence Yun , NAR chief economist, said there is more demand than supply in the current market. "Buyer traffic is 25 percent above a year ago when we were already seeing notable gains in shopping activity," he said. "In the same timeframe housing inventories have trended much lower, which is continuing to pressure home prices. The good news is home construction is rising and low mortgage rates are continuing to keep affordability conditions at historically favorable levels. The bad news is that underwriting standards remain excessively tight, while renters are getting squeezed by higher rents."

Total housing inventory at the end of March increased 1.6 percent to 1.93 million existing homes available for sale, which represents a 4.7-month supply 2 at the current sales pace, up from 4.6 months in February. Listed inventory remains 16.8 percent below a year ago when there was a 6.2-month supply.

"The inventory improvement last month results from a seasonal gain, but conditions continue to broadly favor sellers. We need a housing supply of over 6 months to have a generally balanced market between home buyers and sellers, but it's unlikely we'll get there without greater increases in housing construction," Yun said.

Bond markets were already on the move after Treasuries held onto a supportive ceiling at 1.733 around 6am. As domestic market participants filtered in, the gains kept rolling, and took only a brief pause for the 9:30am cash open for stocks.

S&P's tried to get something going in the first 5 minutes, but have since fallen back below the morning's previous lows just after 9am. Bond markets have continued a tortoise-like move into stronger territory as hare-like equities whip around. 10's are now down to 1.691 and S&P's just turned negative and are now at 1554.35. Fannie 3.0 MBS are up 4 ticks on the day now at 104-09.

Last week's dominant supportive ceiling for 10yr Treasuries was 1.733, coming into play on the 3 of the 5 days in addition to several other visits as support and resistance over the previous two weeks. From a close of just over 1.7 on Friday, 10's rose to 1.733 yet again in today's overnight session, and have yet again bounced (several times at 3am and then a few more times at 5-6am). Following the latest bounce, they've quickly moved back to test Friday's latest levels and are currently unchanged at 1.7048.

Earlier weakness was the result of a moderately "risk-on" session in both Asia and Europe. The former got a boost from (almost) 5yr highs in the Nikkei after the G20 approved of Japan's new, aggressive stimulus program. Europe's rally was essentially a quick pop waiting to happen on weekend news that President Napolitano was reelected. This gives some market participants more hope that a functioning government can be formed, while others see it as a bad sign that the country was forced to reelect a president for the first time ever--and an 87 year old who was less than 1 month out from retirement.

Those competing viewpoints were evident in German Bunds' response--initially following Italian optimism, but finding support soon into the session before rallying back to Friday's best levels. Part of quickness of US Treasuries' modest morning rally is due to domestic traders seizing on these realities of the overnight session. It could have been a lot worse for US bond markets, but market participants are increasingly skeptical of any "solution" for Europe, and it shows in the resilience at support levels. Holding 1.733 is a good showing, and gives us a good line in the sand to continue watching as the week progresses.

Fannie 3.0 MBS didn't open until most of the gyrations had already been worked out and are now 2 ticks higher at 104-07--essentially the mid-point of last week's range which was almost exclusively 104-03 to 104-11. The only data so far this morning was the relatively inconsequential Chicago Fed National Activity Index which was weaker than expected. In about an hour, we'll get Existing Home sales as the only significant piece of data for the day. Equities futures are showing +4.5 in S&P contracts, but have fallen 4 points from a frequently hit technical ceiling overnight (1556 in June S&P contracts).