MBS MID-DAY: Post-GDP Gains Mostly Erased Ahead of Auction

MBS Pricing Snapshot

Whereas there was a small amount of reprice risk at the time of the last alert, there's slightly more now. It's still too soon to say that we're entering any sort of abrupt sell-off, but pressure is mounting to the downside after the results of the Fed's scheduled daily Treasury operation (permanent open market operation, or "POMO").

There's no strategic significance to that data, but it can cause supply/demand imbalances that cause price movements. MBS are getting some of the ill effects of that at the moment and have just moved to their post-GDP lows at 100-014 in Fannie 3.5s. This is certainly justifiable reprice risk territory for some lenders though it's still half a point higher vs yesterday. 10's broke 2.54 support and are up to 2.548 currently.

This is one of those alerts that's very much a 'heads-up' and may be inconsequential for most lenders. The gist is that MBS prices hit their highs just as the earliest lenders of the day are taking down their marks or putting out rate sheets. From 100-26 highs in Fannie 3.5s, we're currently down to 100-17. While this is still 19 ticks higher on the day, those 19 ticks (and then some) were already present when early lenders took down marks and/or sent out sheets.

Although the bar has been raised during recent volatility, in terms of how much movement it takes to justify reprice risk, the 9 tick gap from the highs is certainly right in there. It's the sort of level where a certain 'early' lender or two could reprice and we wouldn't be surprised, but the structure of the price action so far this morning is also such that we could see no reprices and still be relatively unsurprised.

So take caution if needed, but also note that trading levels aren't yet melting down in some catastrophic way. The only major concern there is from a technical standpoint as the 2.51 barrier in 10's CONTINUES to hold firm and is now at risk of looking like somewhat of a reversal pattern from a technical perspective. That would get more confirmation on a break above 2.54.

The good news: MBS are significantly higher with Fannie 3.5s up 26 ticks at 100-24 and Fannie 4.0s up 20 ticks at 103-17. 10's are more than 9bps lower at 2.52, but therein lies the bad news--at least for now.

10's had rallied from 2.61 to 2.55 in the overnight session. From there, the next significant band of resistance would be between 2.51 and 2.524. After a weaker-than-expected GDP report, 10's indeed rallied right to 2.51, but bounced higher and have yet to revisit that floor. We're not sure they won't make another attempt to do so, but given the size of the 'miss' in the GDP data, one would hope that QE expectations would be sufficiently rattled so as to allow a revisit to more recently nostalgic levels.

The saving grace for mortgage markets may be the heartiness of MBS' outperformance. Spreads continue their convicted move tighter to 10s and while the latter are still a few bps away from yesterday's best levels, MBS are already there. Stability here would be better than an ongoing rally as far as rate sheets are concerned. The firmer platform lenders have at rate sheet time, the more they may be willing to pass on. So in that sense, sideways from here isn't a bad thing (if 10's continue to be thwarted at 2.51. If they don't, then hopefully they too can hold sideways underneath a post-GDP high yield just over 2.54).

There's no remaining significant data today though there are two Fed speakers at 10am and a potentially important 5yr Note Auction at 1pm.

- Final Q1 GDP +1.8 vs +2.4 Forecast
- Final Sales +1.2, lowest since Q1 2011
- Deflator +1.3 vs +1.1 consensus
- PCE Price Index +1.0, and Core +1.3, as expected
- Corporate Profits -1.1 vs -1.7 consensus

- Market Reaction: broadly positive for bond markets, which were already rallying ahead of the data. We'd like to see a bit firmer conviction for 10's to rally past yesterday's low yields, but they're currently blocked by 2.51 and up at 2.533.

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.8 percent in the first quarter of 2013 (that is, from the fourth quarter to the first quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 0.4 percent.

The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued last month. In the second estimate, real GDP increased 2.4 percent. With the third estimate for the first quarter, the increase in personal consumption expenditures (PCE) was less than previously estimated, and exports and imports are now estimated to have declined.

The increase in real GDP in the first quarter primarily reflected positive contributions from PCE, private inventory investment, and residential fixed investment that were partly offset by negative contributions from federal government spending, state and local government spending, and exports. Imports, which are a subtraction in the calculation of GDP, decreased.