MBS MID-DAY: Eerily Calm Start to FOMC Week

MBS Pricing Snapshot

Treasury yields were heading into 10am NAHB data at 2.13 (10yr) and are now up to 2.1475. Fannie 3.5 MBS fell 2 ticks to 103-15. This moderate weakness is in response to a much stronger than expected Housing Market Index from the National Association of Homebuilders (NAHB). The main index moved over 50 (anything over 50 is positive territory) for the first time since 2006.

The report isn't typically a reliable market mover, but can have this sort of impact when the headline is this far from consensus (52 vs 45). So far, we're still inside the lows of this morning's trading range in MBS and wouldn't be expecting negative reprice risk unless we fell several more ticks.

To be sure, this is still a risk given the technical break higher in 10yr yields (had been holding at 2.145 and just moved up to 2.15). We may not have seen the move play out in full yet.

- Headline Index at 52 vs 45 consensus, 44, previously
- Current Single-Fam Sales 56 vs 48 previously
- Prospective Buyers 40 vs 33 previously
- 6-mo Outlook 61 vs 52 previously

Market Reaction: Treasury yields spiking moderately. Only 1-2 ticks weaker in MBS so far.

Builder confidence in the market for newly-built single-family homes hit a significant milestone in June, surging eight points to a reading of 52 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) released today. Any reading over 50 indicates that more builders view sales conditions as good than poor.

“This is the first time the HMI has been above 50 since April 2006, and surpassing this important benchmark reflects the fact that builders are seeing better market conditions as demand for new homes increases,” said NAHB Chairman Rick Judson, a home builder and developer from Charlotte, N.C. “With the low inventory of existing homes, an increasing number of buyers are gravitating toward new homes.”

The eight-point jump in the index was the biggest one-month gain since August and September of 2002, when the HMI recorded a similar increase of eight points.

“Builders are experiencing some relief in the headwinds that are holding back a more robust recovery,” said NAHB Chief Economist David Crowe. “Today’s report is consistent with our forecast for a 29 percent increase in total housing starts this year, which would mark the first time since 2007 that starts have topped the 1 million mark.”

10yr Treasuries had a relatively docile night in terms of volume and volatility--both showing up in less-than-average amounts. Indeed Friday already spoke to the likelihood that traders were hunkered down for the upcoming FOMC Events with similarly moderate, sideways movement in similarly light volume.

Asian hours saw yields open just slightly higher, but they held perfectly flat despite advancing equities and Dollar/Yen. The European session had a more noticeable effect, with the Bundesbank saying that Germany's economic growth is likely to fall over the summer. This ushered Bund yields quickly lower, and helped Treasuries facilitate a move to their lowest yields of the morning right as the domestic session began.

10's hit 8am at 2.112, whereupon traders with short term bets on lower yields sold to book profits. Yields rose to 2.14 right at the 8:30am release of the Empire State Manufacturing data. The stronger-than-expected headline stood the chance of motivating more weakness, but the internal components of the report were lackluster at best. This offset any bearish bias coming out of the report and suggested more of a sideways reaction.

Since the report, that's more or less what we've seen with 10's staying between 2.14 and 2.125, currently 2.131. Fannie 3.0s are 1 tick higher on the day at 103-17 and haven't strayed more than 2 ticks lower than that. Equities futures are off their overnight highs but appreciably higher vs Friday's close (over 12 points in S&P Futures). The only remaining data this morning is NAHB's Housing Market Index at 10am

- Headline index +7.84 vs 0.0 forecast
- Employment Index 0.0 vs +5.68 previously
- New Orders -6.69 vs -1.17 previously

The June 2013 Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved modestly. The general business conditions index—the most comprehensive of the survey's measures—rose nine points to 7.8. Nevertheless, most other indicators in the survey fell. The new orders index slipped six points to -6.7, the shipments index fell twelve points to -11.8, and the unfilled orders index fell eight points to -14.5. The prices paid index held steady at 21.0, while the prices received index rose seven points to 11.3. Labor market conditions worsened, with the index for number of employees dropping to zero and the average workweek index retreating ten points to -11.3. Continuing the trend seen in the past few months, indexes for the six-month outlook declined, suggesting that optimism about future conditions was weakening further.

In a series of supplementary survey questions, manufacturers were asked to look back and assess the short-term and medium-term effects of Superstorm Sandy on their business. As in last November’s survey (conducted immediately after the storm), the vast majority of upstate firms said that they were essentially unaffected by the storm. However, firms in New York City, Long Island, and the Lower Hudson Valley reported that it took an average of more than two weeks after the storm for business to get back to normal, and more than a third of these firms said that the storm had adversely affected their overall business revenue during the seven months since Sandy.