MBS MID-DAY: Another Mid-Morning Sell-Off

By: Matthew Graham
MBS Live: MBS Morning Market Summary
Once again, please note the timestamp in the pricing snapshot below, as it is about an hour and a half old now.  This time gap will continue to be the case when negative reprice alerts are necessary in the 11am hour in order to facilitate the most timely analysis for the MBS Live community.  With that said, negative reprices were again necessary in the 11am hour!  Several of them, in fact!  The first of these made the cut today to be included in MID-DAY, and conveys about as much info as we ever got regarding the sell-off.  There was no standout piece of data and no headline to drive the weakness, but it clearly began on the bid side of the MBS market.  Buyers left the building and those looking to sell followed them all the way out the door.  The fact that stock markets took off higher shortly thereafter is perhaps worth half an eyebrow being raised over the possibility that MBS were sold to free up cash for equities, but after late April and early May, it doesn't really feel safe to discuss the concept of anything that sounds like a "great rotation" type trade.  More important than causality is reality, and it's been an ugly one for MBS, which are now down to 102-16-ish.  
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
FNMA 3.0
102-21 : +0-05
FNMA 3.5
105-08 : +0-03
FNMA 4.0
106-08 : +0-02
FNMA 4.5
107-05 : +0-01
GNMA 3.0
104-06 : +0-04
GNMA 3.5
107-06 : +0-00
GNMA 4.0
108-08 : +0-01
GNMA 4.5
108-02 : -0-03
FHLMC 3.0
102-08 : +0-04
FHLMC 3.5
105-00 : +0-03
FHLMC 4.0
106-00 : +0-03
FHLMC 4.5
106-12 : +0-01
Pricing as of 11:09 AM EST
Morning Reprice Alerts and Updates
Below is a recap of instant Reprice Alerts and updates issued via email and text alert to MBS Live subscribers this morning.

11:05AM  :  ALERT ISSUED: Mystery Pop Lower in MBS. Negative Reprice Risk
'Mystery pop" is not a new brand of popcorn, but rather, refers to an MBS-specific selling spree underway currently, and one that defies readily accessible explanation. We'll update you when we know more about it, but for now, Mortgages are leading the rest of bond markets into weaker territory. Fannie 3.0s are off 6 ticks from highs--enough for negative reprice risk to be slightly elevated--and now up only 3 ticks on the day at 102-19. 10yr yields are up to 1.954, draged up almost 3bps in the past 10 minutes. Stay tuned...
10:14AM  :  ECON: NAHB Housing Market Index Slightly Higher
- Headline Index at 44 vs 43 forecast and 41 previously
- Current Single Fam sale index 48 vs 44 previously
- Prospective Buyers Index 33 vs 30 previously
- 6 mo outlook index 53 vs 52 previously

- Market Reaction: Not much of a reaction, if any, in bond markets. a correction off the highs of the day was already in the works, but even that has been muted so far. Stocks are slightly higher.

From the NAHB:
Builder confidence in the market for newly built, single-family homes improved three points to a 44 reading on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for May, released today. This gain, from a downwardly revised 41 in April, reflected improvement in all three index components – current sales conditions, sales expectations and traffic of prospective buyers.

“Builders are noting an increased sense of urgency among potential buyers as a result of thinning inventories of homes for sale, continuing affordable mortgage rates and strengthening local economies,” noted National Association of Home Builders (NAHB) Chairman Rick Judson, a home builder from Charlotte, N.C. “This is definitely an encouraging sign even amidst rising challenges with regard to the cost and availability of building materials, lots and labor.”

“While industry supply chains will take time to re-establish themselves following recession-related cutbacks, builders’ views of current sales conditions have improved and expectations for the future remain quite strong as consumers head back to the market in force,” said NAHB Chief Economist David Crowe.
9:23AM  :  ECON: Industrial Production Weaker Than Expected
- April Industrial Output -0.5 vs -0.2 forecast
- Capacity Use Rate 77.8 vs 78.3 consensus

- Market Reaction: new lows for 10's at 1.93 and new highs for MBS at 102-26 (Fannie 3.0s)

Industrial production decreased 0.5 percent in April after having increased 0.3 percent in March and 0.9 percent in February. Manufacturing output moved down 0.4 percent in April after a decline of 0.3 percent in March. The index for utilities decreased 3.7 percent in April, as heating demand fell back to a more typical seasonal level after having been elevated in March because of unusually cold weather. The output of mines increased 0.9 percent in April. At 98.7 percent of its 2007 average, total industrial production was 1.9 percent above its year-earlier level. The rate of capacity utilization for total industry decreased 0.5 percentage point to 77.8 percent, a rate 0.1 percentage point above its level of a year earlier but 2.4 percentage points below its long-run (1972--2012) average.
9:03AM  :  Bond Markets Improving After NY Fed Data, Technical Support
Although Treasury yields maintained high yields (around 1.985) through much of the Asian session, the highs also provided a flat ceiling of support. Bonds ultimately pushed lower from that ceiling, even before the European hours as Japanese debt rallied. For the past several sessions, massive sell-offs in Japanese government bonds have been a drag on Treasuries overnight. Today brought news of targeted buying from the Bank of Japan which finally broke the ongoing theme, at least for today.

The first hours of European trading helped solidify the gains in bond markets as German 10's fell around 5 bps, but they bottomed out just after 5am and then went on a tear, erasing all the gains inside 2 hours. Bunds' bounce helped Treasuries hold the ceiling at 1.98 before domestic traders contributed to the rally when they got in for the day, getting 10's back to mid 1.95's before the morning data.

Weaker-than-expected NY Fed Manufacturing (Empire State Survey) helped extend the bounce, which stalled out at 1.935 before heading back up over 1.94. MBS opened a tick into positive territory, and are up 8 ticks currently (half of it before the data, half after) at 102-24. S&P Futures are down about 3 points, but not back to overnight lows.

Next up is Industrial Production at 9:15am and NAHB Housing Market Index at 10am.
8:46AM  :  ECON: Producer Prices Drop Most Since Feb 2010
- Headline PPI -0.7 vs -0.6 Forecast
- Core PPI +0.1 vs +0.1 Forecast
- The more closely related to crude oil, the bigger the drop. Energy down 2.5 pct overall with gas down 6.0 and heating oil down 8.8.

- Market Reaction: Empire State Survey is the bigger mover.

The Producer Price Index for finished goods decreased 0.7 percent in April, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Prices for finished goods fell 0.6 percent in March and increased 0.7 percent in February. At the earlier stages of processing, prices received by manufacturers of intermediate goods declined 0.6 percent, and the crude goods index moved down 0.4 percent. On an unadjusted basis, prices for finished goods advanced 0.6 percent for the 12 months ended April 2013, the smallest 12-month rise since a 0.5-percent increase in July 2012.
8:41AM  :  ECON: Empire State Manufacturing Weaker Than Expected
- Business Conditions -1.43 vs +4.0 forecast
- Prices Paid and 6-month Outlook were biggest factors
- Market Reaction: helping reinforce moderate bounce back that was already in progress. 10's down to 1.94. MBS up 7 ticks to 102-23.

The May 2013 Empire State Manufacturing Survey indicates that conditions for New York manufacturers declined marginally. The general business conditions index fell four points to -1.4, its first negative reading since January. The new orders index also edged into negative territory, and the shipments index fell to zero. The prices paid index declined eight points to 20.5, indicating a slowdown in selling price increases, while the prices received index was little changed at 4.6. Employment indexes were mixed, showing both a modest increase in the number of employees and a slight decline in the length of the average workweek. Indexes for the six-month outlook were generally lower, suggesting that optimism about future conditions had weakened.

In a series of supplementary survey questions, firms were asked about past and expected changes in both the prices they paid for inputs and the prices they charged their customers. The same questions had previously been asked in surveys conducted in May 2012 and in May of earlier years. In the current survey, respondents, on average, expected the prices they paid to climb by 2.8 percent—the smallest anticipated rise since May 2009. Moreover, the average respondent anticipated an increase of just 1.2 percent in prices received—the smallest expected increase recorded since these questions were first asked in May 2007.
Live Chat Featured Comments
A recap of the featured comments from the MBS Live Dashboard's Live Chat feature, utilized by hundreds of industry professionals each day.

Steven Stone  :  "mortgagee letter 11-11 As a means of controlling risk to FHA’s Insurance Fund, mortgagees must not use an appraisal to increase the insurable mortgage balance beyond the sum of the outstanding principal balance and the new Up-Front Mortgage Insurance Premium. The mortgagee may not add closing costs, discount items, prepaid items, or other financing costs to the new loan balance. Mortgagees may only increase the insurable balance beyond the sum of the outstanding principal balance and the new Up-"
Gaius Rossini  :  "no errata - just changed it without letting people know... good enough for gov't work"
Gaius Rossini  :  "the one that was actually posted on 1/31 was different"
Gaius Rossini  :  "if you read it now, it says 6/3."
Gaius Rossini  :  "the FHA messed up - they posted two versions of the same mortgagee letter"
Matthew Graham  :  "RTRS- ENERGY PRICES DROP ACCOUNTS FOR MORE THAN 80 PCT OF DECLINE IN APRIL PPI-LABOR DEPT "
Matthew Graham  :  "RTRS- U.S. APRIL PPI EXFOOD/ENERGY +0.1 PCT (CONS +0.1 PCT) VS MARCH +0.2 PCT "
Victor Burek  :  "with new upfront ontop of that"
B-C  :  "then you can borrower 97.75% of the new value"
Matthew Graham  :  "RTRS- U.S. APRIL PPI -0.7 PCT, BIGGEST DROP SINCE FEB 2010, (CONSENSUS -0.6 PCT), VS MARCH -0.6 PCT "
Gaius Rossini  :  "what if home prices appreciate 10% and you get a new appraisal showing that"
Matthew Graham  :  "RTRS- NY FED'S EMPIRE STATE PRICES PAID INDEX 20.45 IN MAY VS 28.41 IN APRIL "
B-C  :  "so did I SS but I just submitted one"
Matthew Graham  :  "RTRS- NY FED'S EMPIRE STATE SIX-MONTH BUSINESS CONDITIONS INDEX 25.48 IN MAY VS 31.95 IN APRIL "
Steven Stone  :  "i thought they got rid of rolling in the closing costs"
B-C  :  "Gaius they can w an appraisal, I am almost 100% sure limit is 97.75%"
Matthew Graham  :  "RTRS- NY FED'S EMPIRE STATE BUSINESS CONDITIONS INDEX -1.43 IN MAY (CONSENSUS 4.00) VS 3.05 IN APRIL "
Gaius Rossini  :  "i guess you can always choose to not use the new appraisal if it comes in lower."
Gaius Rossini  :  "hey FHA guys - can a borrower roll in closing costs on an FHA streamline with appraisal? Is there an LTV limit?"
Victor Burek  :  "gdp data out of Europe all worse than expected last night"
John Rodgers  :  "I didn't even mention state and NMLS reporting requirements"
John Rodgers  :  "CFPB, it's another tax to prepare for them. You need Fort Knox level for file and privacy security, LO Comp plans that restrict income (pun intended), education plan that rivals Harvard business school a compliance officer (we hired a lawyer). We’ve spent an entire month on profits to get started. Throw in another four months of profits to pay our taxes for the year and another month to pay for healthcare reform preparation and expense. I’ll start putting money in my pocket around June. "
Oliver S. Orlicki  :  "Not even going to get excited by the fact that we are starting the day green. Need some relief one of these days though."

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