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

MBS Pricing Snapshot

- 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.

- 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.

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.

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

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.

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).

- 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.