MBS Mid-Day: Unphased by Boomy Housing Data

By: Matthew Graham
MBS Live: MBS Morning Market Summary
Coming in to today, markets were curious to see how Pending Home Sales data would inform the discussion about an overheated housing market.  The notion that the Fed is concerned about this, and thus not too concerned about rising interest rates (maybe even happy about them) is becoming increasingly mainstream over the past month.  It was of no small concern then, when today's Sales numbers were much stronger than expected.  While this did indeed mark the turning point for Treasuries, they've been able to stay inside a fairly stable range ahead of the 7yr Auction (2.47-2.52), thus allowing MBS a more stable benchmark environment.  MBS appreciate a stable benchmark environment!!  If Treasuries never moved, MBS yields would tighten and tighten until asymptotically leveling off slightly higher than comparable duration Treasury yields.  This is a bit of an oversimplification of the role of volatility in MBS performance but generally speaking, less volatility means MBS can perform better than they otherwise would (in that they can gain more than Treasuries or lose less).  The fact that even the NAR suggested the boomy Sales figures were at least partly a result of the rising rate environment getting buyers off the sidelines has helped.  In essence, this speaks to a limited pool of buyers that will dry up at some point, as opposed to organic creation of new homebuying demand.  Prices stabilized shortly after the data and are near their highs of the day heading into the Auction.  The pricing snapshot below is out-dated (real-time pricing and alerts available on MBS Live) and Fannie 3.5s are now up 14 ticks at 101-05.
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
97-05 : +0-07
FNMA 3.5
100-30 : +0-07
FNMA 4.0
103-25 : +0-08
FNMA 4.5
105-17 : +0-02
GNMA 3.0
97-32 : +0-08
GNMA 3.5
101-26 : +0-13
GNMA 4.0
104-11 : +0-11
GNMA 4.5
105-17 : +0-06
FHLMC 3.0
96-29 : +0-08
FHLMC 3.5
100-23 : +0-07
FHLMC 4.0
103-19 : +0-09
FHLMC 4.5
104-30 : +0-03
Pricing as of 11:05 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.

11:01AM  :  ALERT ISSUED: Bond Markets Potentially Turning For Worse After Home Sales
It's been a slow-motion reaction to the extra-large 'beat' in Pending Home Sales, but we may be confirming a bounce at the highs. Offsetting the much better-than-expected home sales data has been another dose of Fed speakers jumping in to moderate the market's tapering expectations.

Dudley was first up in this regard, with his prepared remarks hitting at the same time as Pending Home Sales (likely softening the otherwise more bond-bearish blow). In other words, Dudley's reminder that the Fed's withdrawal of QE3 depending on economic conditions and not on calendar dates, as well as his assertion that the Fed would keep most assets on balance sheet for a long time (meaning more accommodation for mortgage markets) was a positive factor for bond prices versus Pending Home Sales being a negative factor.

Fed's Powell was just out in a similar vein, but was less obviously trying to talk markets off the ledge. He even went so far as to argue the other side of the "soothing agenda" by saying that tapering and withdrawal could happen EVEN SOONER if economic conditions warrant. Granted, he was likely trying to emphasize the same point about the decision being "all about economic data," but in so doing, made another statement that stood the risk of spooking bond markets.

Dudley, in his Q&A, which is ongoing, subsequently reiterated the same notion, saying that economic data is MORE IMPORTANT than the risk that tighter financial markets may hurt the economic recovery. In other words--and this is an important point--THE FED IS NOT IN THE BUSINESS OF TRYING TO PREDICT HOW THEIR POLICY CHANGES WILL AFFECT THE RECOVERY! Data first, policy reaction second!

Bond market bulls would hope for something else--perhaps for the Fed to be concerned enough about the recent rise in rates to "do something" about it in the next few months, but Dudley is reaffirming that which we've already harped on. Again, that's "data first, reaction second."

The extent to which that is playing in to the incremental weakness we've seen since 10am is unclear, but there's no need to overcomplicate things. Bond markets hit their best recent levels and then got a healthy dose of bullish economic data. They've since turned a corner and are heading in the other direction. Rate sheets generally came out before that corner was turned, so some negative reprice risk is a factor soon-ish. Fannie 3.5s are off their 101-04 highs, down 6 ticks to 100-30.
10:11AM  :  Freddie PMMS: Avg 30yr Rate Rises 0.53 Percent
Freddie Mac (OTCQB: FMCC) today released the results of its Primary Mortgage Market Survey® (PMMS®), showing average fixed mortgage rates jumping along with bond yields amid recent Fed remarks that it could begin tapering its bond purchases later this year. The average 30-year fixed-rate mortgage rose from 3.93 percent last week to 4.46 percent this week; the highest it has been since the week of July 28, 2011. This represents the largest weekly increase for the 30-year fixed since the week ended April 17, 1987. Despite the recent gains in mortgage rates, homebuyer affordability remains strong for the typical family in most parts of the country, which should help fuel the ongoing housing recovery.
10:09AM  :  ECON: Pending Home Sales Crushes Consensus
- Pending Sales up 6.7 vs 1.0 consensus
- Highest since December 2006
- 12.1 pct year-over-year

- Market Reaction: In and of itself, this would be a bond-bearish event, but Dudley headlines may be pushing back on the "QE off" movement.

Pending home sales rose in May to the highest level since late 2006, implying a possible spark as mortgage interest rates began to rise, according to the National Association of Realtors®.

The Pending Home Sales Index,* a forward-looking indicator based on contract signings, increased 6.7 percent to 112.3 in May from a downwardly revised 105.2 in April, and is 12.1 percent above May 2012 when it was 100.2; the data reflect contracts but not closings.

Contract activity is at the strongest pace since December 2006 when it reached 112.8; pending sales have been above year-ago levels for the past 25 months.

Lawrence Yun, NAR chief economist, said there may be a fence-jumping effect. “Even with limited choices, it appears some of the rise in contract signings could be from buyers wanting to take advantage of current affordability conditions before mortgage interest rates move higher,” he said. “This implies a continuation of double-digit price increases from a year earlier, with a strong push from pent-up demand.”
9:08AM  :  Slightly Stronger Overnight, Limited Reaction to Data
MBS opened the day a few ticks into positive territory and hopped on the Treasuries' bandwagon of cautious improvements in the overnight session. 10yr Treasuries had been flat during Asian hours and began falling in yield during European hours while global equities generally advanced (same old "QE on/off" trading pattern that's characterized the past 5 sessions).

both MBS and Treasuries had achieved most, if not all of their current gains by the time the 8:30am data hit. The only discernible reaction was a moderate rally and pull back in line with previous levels. Current 10yr yields are about half a bp lower than 8:29:59 levels and MBS are 1 tick better, putting Fannie 3.5s up 8 on the day so far at 100-31 and 10's at 2.49

The best case we can see for a bond bullish response to the data was the fact that Consumption/Income revisions showed that last month required just slightly more income to achieve just slightly less spending. Revisions were only 0.1 pct in either direction, but it could be worth something on a morning where everything else was in line with consensus.

The next significant data arrives at 10am with Pending Homes Sales as well as Fed-speak from NY Fed's Dudley (more street cred than most Fed speakers). 1pm brings the final Treasury auction of the week with 7yr Notes. So far, so green!
8:46AM  :  ECON: Consumer Spending in Line with Estimates Despite Advancing Incomes
- Consumer Spending +0.3 vs +0.3 forecast
- Previous month revised to -0.3 from -0.2
- Income +0.5 vs +0.2 consensus
- Income revised to +0.1 previously vs +0.0
- Tacit conclusion: even higher income was leading to even less spending than previously anticipated. This may be the most bond bullish factor in the otherwise 'as-expected' morning of data.

Personal income increased $69.4 billion, or 0.5 percent, and disposable personal income (DPI) increased $57.0 billion, or 0.5 percent, in May, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $29.0 billion, or 0.3 percent. In April, personal income increased $18.3 billion, or 0.1 percent, DPI increased $6.5 billion, or 0.1 percent, and PCE decreased $39.6 billion, or 0.3 percent, based on revised estimates.

Real disposable income increased 0.4 percent in May, compared with an increase of 0.3 percent in April. Real PCE increased 0.2 percent, in contrast to a decrease of 0.1 percent.
8:37AM  :  ECON: Jobless Claims Almost Perfectly As Expected
- Claims 346k vs 345k forecast
- Continued Claims 2.965 mln vs 2.95 mln forecast

Market Reaction: Limited so far, moderately positive for bond markets if anything.

In the week ending June 22, the advance figure for seasonally adjusted initial claims was 346,000, a decrease of 9,000 from the previous week's revised figure of 355,000. The 4-week moving average was 345,750, a decrease of 2,750 from the previous week's revised average of 348,500.

The advance seasonally adjusted insured unemployment rate was 2.3 percent for the week ending June 15, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending June 15 was 2,965,000, a decrease of 1,000 from the preceding week's revised level of 2,966,000. The 4-week moving average was 2,973,250, a decrease of 9,250 from the preceding week's revised average of 2,982,500.
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.

Matthew Graham  :  "FED'S POWELL SAYS THAT WITH INFLATION IN CHECK, MOST IMPORTANT RISK FROM ASSET BUYING IS FINANCIAL INSTABILITY "
Matthew Graham  :  "FED'S POWELL SAYS COULD MODERATE PACE OF PURCHASES SOMEWHAT FASTER IF ECONOMY TURNS OUT STRONGER THAN EXPECTED "
Matthew Graham  :  "FED'S POWELL REITERATES THAT IF ECONOMY GROWS AS EXPECTED, BOND BUYING TO BE SCALED BACK LATER THIS YEAR, END AROUND MID-2014 "
Matthew Graham  :  "FED'S POWELL: MARKET ADJUSTMENTS LARGER THAN WOULD BE JUSTIFIED BY ANY REASONABLE REASSESSMENT OF THE PATH OF FUTURE FED POLICY "
Andy Pada  :  "Fed seems to focus their message on rate hike and not QE adjustments"
Matthew Graham  :  "FED'S DUDLEY EXPECTS U.S. 2013 GDP GROWTH OF 2.1 PCT; A PICK-UP IN 2014 "
Matthew Graham  :  "FED'S DUDLEY: ECONOMY REMAINS TUG-OF-WAR BETWEEN FISCAL DRAG, UNDERLYING FUNDAMENTAL IMPROVEMENT "
Matthew Graham  :  "DUDLEY: FED LIKELY TO KEEP MOST ASSETS ON BALANCE SHEET FOR LONG TIME; MEANS MORE ACCOMMODATION FOR MORTGAGE MARKETS "
Matthew Graham  :  "FED'S DUDLEY: FIRST RATE RISE A LONG WAY OFF; COULD COME WELL AFTER 6.5 PCT UNEMPLOYMENT IS REACHED "
Matthew Graham  :  "FED'S DUDLEY: MARKET EXPECTATIONS FOR EARLIER RATE RISE 'QUITE OUT OF SYNC' WITH FED STATEMENTS, EXPECTATIONS OF MOST FOMC MEMBERS "
Matthew Graham  :  "FED'S DUDLEY: ECONOMIC CONDITIONS COULD 'DIVERGE SIGNIFICANTLY' FROM FOMC'S EXPECTATIONS "
Matthew Graham  :  "FED'S DUDLEY: TIMELINE FOR WITHDRAWAL OF QE3 DEPENDS ON ECONOMIC OUTLOOK, NOT CALENDAR DATES "
Alan Craft  :  "Go Dudster"
Matthew Graham  :  "PHS skyrocket: RTRS - U.S. MAY PENDING HOME SALES INDEX +6.7 PCT (CONSENSUS +1.0 PCT) TO 112.3, HIGHEST SINCE DEC 2006-REALTORS "
Matthew Graham  :  "FED'S DUDLEY: QE3 WOULD CONTINUE AT HIGHER PACE FOR LONGER THAN BERNANKE'S TIMELINE IF GROWTH, LABOR MARKET MISS FOMC FORECASTS "
Andy Pada  :  "Dudley!"
Matthew Graham  :  "good for Freddie. RTRS- U.S. 30-YR FIXED RATE MORTGAGES 4.46 PCT JUNE 27 WEEK, HIGHEST SINCE JULY 2011, VS 3.93 PCT PRIOR WEEK-FREDDIE MAC "
Matthew Graham  :  "PMMS comes through with an accurate update!"
Jason Anker  :  "wells is out and .3 better"
Matthew Carver  :  ".500 better"
Matthew Carver  :  "Quicken JUST released"
Matthew Graham  :  "we should know already, should we not?"
Michael Gillani  :  "So MG, would you expect that lenders may be a little more forthcoming with better pricing today since we're doing the back to back green thing?"
Hugh W. Page  :  "uneventful data really"
FPH  :  "In line with expectations. Anything that isn't a big beat has been a win. "
FPH  :  "So far so good. "
Matthew Graham  :  "RTRS - US MAY REAL CONSUMER SPENDING +0.2 PCT VS APRIL -0.1 PCT (PREV +0.1 PCT) "
Matthew Graham  :  "RTRS - US MAY PERSONAL INCOME +0.5 PCT (CONS +0.2 PCT) VS APRIL +0.1 PCT (PREV UNCHANGED) "
Matthew Graham  :  "RTRS- US MAY PERSONAL SPENDING +0.3 PCT (CONSENSUS +0.3 PCT) VS APRIL -0.3 PCT (PREV -0.2 PCT) "
Matthew Graham  :  "RTRS- US CONTINUED CLAIMS FELL TO 2.965 MLN (CONS. 2.950 MLN) JUNE 15 WEEK FROM 2.966 MLN PRIOR WEEK (PREV 2.951 MLN) "
Matthew Graham  :  "RTRS - US JOBLESS CLAIMS FELL TO 346,000 JUNE 22 WEEK (CONSENSUS 345,000) FROM 355,000 PRIOR WEEK (PREVIOUS 354,000) "
Matthew Graham  :  "from June 19th (and "Dealers" vs "Strategists") RTRS- REUTERS POLL-16 OF 17 PRIMARY DEALERS SEE FED TAPERING BOND PURCHASES BY THE END OF 2013 "
Matthew Graham  :  "RTRS- REUTERS POLL-U.S. 10-YR T-NOTE YIELD SEEN AT 2.30 PCT IN 3 MTHS, 2.75 PCT IN 1 YR (MAR POLL 2.08, 2.45) "
B-C  :  "so that is less than 33%"
Matthew Graham  :  "RTRS- REUTERS POLL-FED TO BEGIN TAPERING MONTHLY ASSET PURCHASES BY $20 BLN, IN LINE WITH DEALER ECONOMIST POLLS "
Matthew Graham  :  "RTRS- REUTERS POLL-13 OF 37 BOND STRATEGISTS EXPECT U.S. FEDERAL RESERVE TO START TAPERING BOND PURCHASES BY SEPT "
Tom Sawyer  :  "It would be nice to hold 2.49 after the data"
FPH  :  "Broke that 2.5. These 830 reports could be huge. "
Matt Hodges  :  "methinks two green days in a row"

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