MBS MID-DAY: On The Mend After Morning Sell-Off

By: Matthew Graham
MBS Live: MBS Morning Market Summary

Most of the pertinent details of the morning have been covered in the previous 'special alert.'  The recap below fills in the blanks with more specific detail on the now irrelevant overnight session as well as some of the bullet points on the data.  To recap the recap, this morning's big nasty swing was all about Chicago PMI.  Well, nothing is ever really "ALL about" anything when it comes to markets, but that data was the trigger point for the sell-off.  The EXTENT of the sell-off is something that relied on all the other considerations in play.  Chief among them would be the ongoing establishment of a pre-NFP range that we've been discussing since Wednesday morning.  That range would have been widened or shifted away from neutrality if we'd broken below the 2.07/2.09 gap seen in this morning's Treasury chart.  That's a very important gap, and importantly, it's been very soundly rejected with this morning's move. This maintains the sideways trend between 2.17 and 2.07 heading into NFP without yet giving any hints of consolidation (trading range forms a triangle) or trend (trading range tilts higher or lower)

Since the sell-off, MBS have ground back a few ticks and are into the 100-20's currently.  10's tested 2.17 repeatedly and have since ebbed lower into the 2.15's.  So far, we're setting up for an afternoon that looks to be far less eventful than most recent Friday afternoons thanks to the morning sell-off and decent show of support.  That's little consolation for the damage done to rate sheets, but (fingers crossed) it could make for a less stressful reprice risk situation in the PM hours.

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
100-20 : -0-13
FNMA 3.5
103-22 : -0-10
FNMA 4.0
105-18 : -0-05
FNMA 4.5
106-27 : -0-04
GNMA 3.0
101-28 : -0-14
GNMA 3.5
105-06 : -0-09
GNMA 4.0
106-05 : -0-02
GNMA 4.5
106-21 : -0-03
FHLMC 3.0
100-08 : -0-13
FHLMC 3.5
103-14 : -0-10
FHLMC 4.0
105-10 : -0-06
FHLMC 4.5
105-32 : -0-04
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.

10:14AM  :  ECON: Consumer Sentiment Slightly Stronger Than Expected
- Headline Sentiment 84.5 vs 83.7
- Current Conditions 98.0 vs 96.0
- expectations 75.8 vs 74.7
- Index highest since July 2007, Conditions highest since August 2007

market reaction: This report itself wasn't a big enough beat to justify major damage to bond markets, but it did step aside for the momentum already in place following Chicago PMI. It may have added to it slightly.

From Reuters:
Greater optimism over the economic outlook and personal finances in the midst of record stock market prices pushed U.S. consumer sentiment to its highest level in nearly six years in May, a survey released on Friday showed. While upper income households continued to set the pace, confidence also began to improve among middle and lower income households in the latter part of the month. Wealthier households are more likely to be invested in equities and reap the benefits of this year's sharp stock market rally. The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment rose to 84.5 from 76.4 in April. It was the highest level since July 2007. The report topped expectations for 83.7, which was May's preliminary figure earlier in the month.
10:08AM  :  ECON: Chicago PMI Much Higher Than Expected
- PMI 58.7 vs 50.0 Consensus
- Prices Paid 55.3 vs 51.0
- Employment Index 56.9 vs 48.7
- Production 62.7 vs 49.9
- PMI and Production both highest since March 2012

Market Reaction: 3 alerts are out on this already. Fair to say "reaction=bad for bond markets

The Chicago Purchasing Managers reported April's Chicago Business Barometer sprung 9.7 to 58.7, the highest since March 2012 and in sharp contrast to April's 3-1/2 year low. All Business Activity measures surged in May, reversing weakness seen in most categories in March and April.
10:04AM  :  ALERT ISSUED: More Selling After Consumer Sentiment
10yr yields have gone from a docile stroll along the 2.10 area to aggressively testing 2.17 after Consumer Sentiment data came in marginally stronger than expected. The big move was initially motivated by the freakishly strong Chicago PMI at 9:45am. Subscribers to ISM Chicago get that data at 9:42am and when big trades start hitting around that time, it sends shockwaves through markets, usually soon-to-be-confirmed shockwaves after everyone gets a look at the data 3 minutes later.

Consumer Sentiment had a chance to kick the selling into high gear or to suggest moderation. 2.17% was likely to be the scene of the next "test" for 10yr yields and the moderately bullish data was enough to get us there, but not to break through. 10's are currently around 2.16, but trading is active and it's too soon to know whether we're looking at a consolidation for what will be a bigger move into weaker territory, or if 2.17 has indeed held its ground as a supportive ceiling. Hoping for the latter, obviously, as it suggests better prospects for MBS ground-holding.

Speaking of MBS, Fannie 3.0s are down 13 ticks now to 100-20, but quotes and trades are whipping around violently. 4 ticks in either direction is possible in mere seconds. Negative reprices are likely from any lenders who were out with pricing before 9:42am.
9:49AM  :  ALERT ISSUED: Update on Latest Alert
It probably would have made sense to look more closely at the clock before sending the last alert considering that we'd already warned about the 9:42am time frame as being potentially volatile due to the early release of Chicago PMI to subscribers, but yeah... that... Big nasty beat on the data. 58.7 vs 50.0. MBS now down 7 ticks to 100-26 and 10's up to 2.1335. Consumer Sentiment in 7 minutes could confirm the move or ease some of the pain. More to follow
9:43AM  :  ALERT ISSUED: Selling Off After Equities Open, Negative Reprice Risk Already?
Actually yes, there's already a decent chance of negative reprice risk for any lender that was already out with pricing this morning as MBS and Treasuries are doing some early morning cliff-diving. We don't know what's behind the move at the moment but the spike in Treasuries is BIG and in BIG volume. We expect to get some headline driving the move shortly.

Reprice risk has gone from "maybe" to "likely" for any lenders out with pricing already during the course of typing these words. More to follow as we learn more.
9:23AM  :  Bond Markets Stronger Overnight, Mostly Holding Ground After Data
Surprisingly enough, weaker-than-expected Incomes/Outlays data brought only a brief positive reaction to the headline with both MBS and Treasuries now slightly weaker than pre-data levels. Tradeflows and technicals are the likely culprits.

In terms of flows, the overnight session was the lightest of the week, and buyers were in control (yields lower) in both Asian and European sessions. Recently, US Treasuries have been increasingly resigned to simply tie themselves to the back of movement in Yen and Japanese Bonds at the start of the overnight session, and hop over to German Bunds during the second half before domestic market participants take things in the direction THEY want to take them.

One great recent example of this was where Japan took US 10yr yields up to 2.235 overnight (5/29), yet we opened under 2.17. Last night was no different but in reverse this time (and with smaller swings). 10's made it down to the terrifyingly important pivot point at 2.07 and bounced hard around the 6am hour (here's the "technical" component to the "tradeflows and technicals"). We've been trending into weaker territory ever since and Consumer Spending data did relatively nothing to stop it.

All that having been said, the overnight gains were sufficient, and the counter-trend weak enough that we're still in positive territory. Fannie 3.0s are 4 ticks higher on the day at 101-05 and 10's are about 2bps lower at 2.10. As expected, month-end buying has been lighter than historically normal and the fear is that continues to be the case through the close.

Tradeflows aside, data matters, and we're going to get the last two big reports of the week at 9:45 with Chicago PMI at 9:45 and Consumer Sentiment at 9:55am. Both have movement potential (keep in mind that Chi-PMI will cause a big swing at 9:42am if it's going to come in far away from consensus).
8:38AM  :  ECON: Income and Spending Both Lower Than Expected
- Consumer Spending -0.2 vs +0.1 forecast
- First decline since May 2012
- Income +0.0 vs +0.1 forecast
- PCE Prices +0.0 vs +0.1 forecast

- Market Reaction: very slight, very brief positivity and now back to pre-data levels. Next!

Personal income decreased $5.6 billion, or less than 0.1 percent, and disposable personal income (DPI) decreased $16.1 billion, or 0.1 percent, in April, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $20.5 billion, or 0.2 percent. In March, personal income increased $36.2 billion, or 0.3 percent, DPI increased $25.4 billion, or 0.2 percent, and PCE increased $14.2 billion, or 0.1 percent, based on revised estimates.

Personal outlays -- PCE, personal interest payments, and personal current transfer payments -- decreased $21.7 billion in April, in contrast to an increase of $16.4 billion in March. PCE decreased $20.5 billion, in contrast to an increase of $14.2 billion.
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.

Ross Miller  :  "got 1 locked after rate sheets came out and before the reprice. Just paid for my subscription for the next 15 months. Thanks MG."
Craig LaBruno  :  "Yeah I would agree with the lock at time of app stance right now. I'm taking a bath on a couple loans that I didn't do that on and I wish I had."
Hugh W. Page  :  "I wouldn't be able to sleep if I didn't lock in this market (not that I'm sleeping anyway!)"
Jason Anker  :  "if you like your rate lock now. your playing with fire in this market"
Matt Hodges  :  "lock 2 weeks ago"
Jason Anker  :  "lock yesterday"
Jon Koester  :  "I have 14 days left on a purchase. Lock in now or wait?"
Jason Anker  :  "i got one in with Wells 10 sec after, needless to say - you da man"
Matthew Graham  :  "not common (sadly the only few times I've actually done that in chat have been this month...)"
Mike Drews  :  "me too"
Jason Anker  :  "MG - T-shirt "MG says lock" "
Jason Anker  :  "i fell off my chair when I saw MG = lock"
Matt Hodges  :  "lenders are desperate to get brokers to repurchase, when Fannie/Freddie tells the lender to repurchase... vicious"
Jason Anker  :  "No ratio was an income documented ratio ignor product"
Andy Pada  :  "I have a qc issue/question: We have a No Ratio loan (from back in 2007). It is being reviewed. The bank statement shows a "large deposit." At time of closing, borrower advised that it is her 2 bi-weekly checks that she deposited at once. Since the loan is no ratio, can the investor require that I document the income?"
Christopher Stevens  :  "REPRICE: 10:23 AM - Wells Fargo Worse"
Brayden Alexander  :  "green by happy hour... either MBS prices or my face from to many pre-happy hour cocktails."
Jason Nugent  :  "Where are the lemmings for this cliff dive"
Hugh W. Page  :  "Consumer Sentiment Data is usually well above 85 when your growing out of a recession. Sentiment needs to move higher from here to sustain a recovery IMO. http://www.calculatedriskblog.com/2013/05/final-may-consumer-sentiment-increases.html"
Ted Rood  :  "Maybe they can release May unemployment today at +325 and just put us out of our misery now."
Craig LaBruno  :  "My monitor looks like a Christmas tree"
Hugh W. Page  :  "Trend not our friend though"
Ted Rood  :  "Just another boring day in MBS land. Can't wait for the next Yahoo article on how rates went back down this week."
Hugh W. Page  :  "Batten down the hatches . . . the storm will pass and then reality will set in. Are things really that rosy? "
Matthew Graham  :  "this bounce at 2.17 makes a lot of sense."
Troy Brenner  :  "and I thought Russia had the highest base jumper...yikes that FNMA 30 drop looks aggressive"
Sung Kim  :  "just when you thought it was safe to go back in the water..."
Jason Harris  :  "It never ceases to amaze how quickly two good days can be wiped out in about 10 minutes"
Justin Harward  :  "Wow. Up 4... Reply to an email. 10 min later down 9??"
Matthew Graham  :  "RTRS- CHICAGO PURCHASING MANAGEMENT INDEX 58.7 IN MAY (CONSENSUS 50.0) VS 49.0 IN APRIL "
Victor Burek  :  "wow"
Matthew Graham  :  ""something" has sent some major panic through the treasury complex"
Matthew Graham  :  "and I don't just mean big move , because I know you can see that on your screens, but it's not just an outlying spike"
Oliver S. Orlicki  :  "what is going on?"
Jude Bridwell  :  "This is unbelievable"

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