MBS MID-DAY: Revisiting Pre-Golden-Era Volatility

MBS Pricing Snapshot

You'll see the word "volatility" come up a lot from here on out. Expect bigger swings and don't let the gaps between prices surprise you. They're normal until further notice. For example, at last update, MBS were down over half a point and have since regained that to approach breakeven on the day.

For Fannie 3.5s, that's 101-30 (1 tick off). 10's are back under 2.40 now at 2.373. By the time you read these levels, they're likely to have changed for the better or worse. Liquidity was completely sapped this morning and is slowly returning, slowly benefiting prices. As it returns in fits and starts, it's like microwave popcorn. The first few kernels didn't mean much, but now there's starting to be a rhythm, and the real battle for 2.40% is beginning (and it would be fought at yesterday's high volume pivots nearer 2.34-2.36).

- 5.18 mln unit annual rate vs 5.0 mln forecast
- 2.22 mln units of inventory / 5.1 months worth
- Median Prices $208k, highest since July 2009
- Distressed Sales unchanged at 18 pct

Market Reaction: Along with stronger-than-expected Philly Fed data, this report possibly contributed to a brief move weaker in bond markets, but both MBS and Treasuries have since moved back to pre-data levels.

Existing-home sales improved in May and remain solidly above a year ago, while the median price continued to rise by double-digit rates from a year earlier, according to the National Association of Realtors®.

Total existing-home sales1, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 4.2 percent to a seasonally adjusted annual rate of 5.18 million in May from 4.97 million in April, and is 12.9 percent above the 4.59 million-unit pace in May 2012.

Lawrence Yun, NAR chief economist, said the recovery is strengthening and to expect limited housing supplies for the balance of the year in much of the country. “The housing numbers are overwhelmingly positive. However, the number of available homes is unlikely to grow, despite a nice gain in May, unless new home construction ramps up quickly by an additional 50 percent,” he said. “The home price growth is too fast, and only additional supply from new homebuilding can moderate future price growth.”

- Business conditions 12.5 vs 2.0 consensus
- New Orders 16.6 vs -7.9 previously
- Employment -5.4 vs -8.7 previously
- New orders highest since March 2011


Market Reaction: Along with the stronger home sales report, this caused a brief blip weaker for bond markets. heading back to pre-data levels now.

The June Business Outlook Survey indicates an expansion of activity this month, with all of the broad indicators — except for employment — recording notable improvement over May. Firms reported higher prices for inputs and their own manufactured goods this month. Firms continue to expect positive growth over the next six months and were relatively more optimistic about adding to payrolls.<

Freddie Mac (OTC: FMCC) today released the results of its Primary Mortgage Market Survey (PMMS), showing average fixed mortgage rates moving slightly lower for the week as markets awaited the Federal Reserve’s monetary policy announcement.

-30-year fixed-rate mortgage (FRM) averaged 3.93 percent with an average 0.8 point for the week ending June 20, 2013, down from last week when it averaged 3.98 percent. Last year at this time, the 30-year FRM averaged 3.66 percent.

-15-year FRM this week averaged 3.04 percent with an average 0.7 point, down from last week when it averaged 3.10 percent. A year ago at this time, the 15-year FRM averaged 2.95 percent.

-5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.79 percent this week with an average 0.5 point, the same as last week. A year ago, the 5-year ARM averaged 2.77 percent.

-1-year Treasury-indexed ARM averaged 2.57 percent this week with an average 0.4 point, down from last week when it averaged 2.58 percent. At this time last year, the 1-year ARM averaged 2.74 percent.

"Mortgage rates were relatively unchanged this week as market participants awaited the Federal Reserve’s (Fed) monetary policy announcement. The Fed stated that economic growth has been expanding at a moderate pace and that labor market conditions have shown further improvement, although the unemployment rate remains elevated. It noted inflation has been running below the Fed’s longer-run objective as well. As a result, the Fed will continue its bond-buying program at the current pace and maintain its highly accommodative monetary policy stance." -Frank Nothaft, vice president and chief economist, Freddie Mac

- PMI 52.2 vs 52.5 forecast
- Manufacturing Output 53.9 vs 52.7 forecast
- Employment 50.4 vs 52.6 in May
- Employment index lowest since Jan 2010

- Market Reaction: Actually helped a bit, due to the employment component.

The Markit Flash U.S. Manufacturing Purchasing Managers’ Index (PMI) suggested that U.S. manufacturing expansion remained modest during June. At 52.2, the flash PMI index, which is based on around 85% of usual monthly replies, was little-changed from May’s 52.3 and the second-lowest since last October.

After having eased to a seven-month low in May, growth of manufacturing output quickened during June. The latest increase in production was solid and the greatest since March, but remained weaker than seen in the first quarter of the year.

MBS wake up this morning to find themselves in a brave new world, with prices not seen since late 2011. Fannie 3.5s are down more than half a point at 101-13-ish and 4.0s are down 15 ticks at 104-00.

Scary things happened in Treasuries overnight. Actually to be quite fair and quite clear, the scariest things were actually a product of early domestic trading. Before then, 10yr yields were holding reasonably sideways vs Friday's latest levels. But when domestic accounts started early trading, money started pouring out of stocks and bonds in unison, and by the bucketful.

The "scary" happened when 10's blatantly ignored the 2.40 pivot point and skyrocketed to 2.471. Volume has been huge and volatility huger. Yields managed to get back down to the lower 2.4's, but then the scariest event of the morning transpired when 2.40 took the form of resistance.

This is the sort of follow-through selling that goes beyond the expectations of a good portion of market participants and is starting to take on the trappings of a 'pain trade.' Past precedent is one of the only comforts in that the similar spike in March 2012 pushed higher for several days before revisiting the levels from the first day of the move.

2013 is decidedly a different time, however, so the spikes have been bigger, the yields higher, and the hope for regression more tempered. There are other reasons to hope for return to yesterday's trading range, but the first goal will be making it back through 2.40. To that end, we're close, with 10's at 2.401 currently, though we'd like to see a sustained break after data wraps up at 10am.

Even then, there are no guarantees, but we have to have that step to build on if we're going anywhere nice. Expect volatility either way, and for what looks like the trend one moment to be completely different the next. Themes may vary even more widely day over day, and may be polar opposite week over week. The only certain stopping point for the pain wagon would be an appallingly bad NFP print in early July (it can certainly stop before then, but that's what it would take for a significant reduction in volatility. Fingers crosses though... Trading levels have improved slightly in the time it's taken to write this (10's at 2.399 and MBS up a tick or two).

- Claims 354k vs 340k forecast
- 4wk average 348,250 va 345,750 previously
- continued claims 2.951 mln vs 2.96 mln forecast

- Market Reaction: token improvement in bond markets so far , unwinding a less-than-satisfying amount of overnight weakness.

In the week ending June 8, the advance figure for seasonally adjusted initial claims was 334,000, a decrease of 12,000 from the previous week's unrevised figure of 346,000. The 4-week moving average was 345,250, a decrease of 7,250 from the previous week's unrevised average of 352,500.

The advance seasonally adjusted insured unemployment rate was 2.3 percent for the week ending June 1, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending June 1 was 2,973,000, an increase of 2,000 from the preceding week's revised level of 2,971,000. The 4-week moving average was 2,967,250, a decrease of 12,750 from the preceding week's revised average of 2,980,000.