MBS MID-DAY: Jar of Flies; Bond Markets Hit Both Sides

MBS Pricing Snapshot

the extra bit of negative price pressure seen after the morning's two pieces of economic data has subsided for now. The bounce brings Fannie 3.5 MBS back to 101-07, just 8 ticks down on the day vs more than half a point of weakness earlier.

The QE on/off trade is still a factor as stocks are bouncing higher and 10yr yields are moving lower at the same time. 10's are back down to 2.514 after hitting 2.55 earlier. S&Ps have about half their losses back vs overnight highs (futures), and are close to yesterday's closing levels.

Any negative reprice risk that had been growing into the 10am hour has definitely backed off, especially as markets were already in rough shape when most lenders came out with pricing. As this trend of stability or gains continues, positive reprices are becoming more of a possibility than any lingering negative risk. We've probably just turned the corner on that.

(Reuters) - U.S. consumer sentiment improved in late June, ending the month close to a near six-year high set in May, as optimism among higher-income families rose to its strongest level in six years, a survey released on Friday showed.

The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment was 84.1 points, just slightly below a near six-year high of 84.5 in May. The late-June figure was higher than the preliminary reading of 82.7.

Economists polled by Reuters had forecast the final June reading of 82.8.

"Consumers believe the (economic) recovery has achieved an upward momentum that will not be easily reversed," survey director Richard Curtin said in a statement.

- Headline PMI 51.6 vs 56.0 Consensus
- Employment 57.8 vs 56.9 (highest since January)
- Prices paid 59.9 vs 55.3

The Chicago Business BarometerTM declined to 51.6 in June, the largest monthly drop since October 2008, and down from a 14-month high of 58.7 in May. The gyrations seen over the past few months are not typical for the Barometer and some of this might be attributable to the unseasonable weather conditions.

Of the five Business Activity measures which make up the Barometer, four declined with only the Employment indicator posting an increase. Order Backlogs plunged deep into contraction to the lowest level since September 2009 and was the single biggest drag on Barometer. Faster Supplier Delivery times and declines in Production and New Orders also contributed to the Barometer’s weakness.

Prices Paid posted the second consecutive monthly increase, following a lull in April, putting it back in line with levels seen at the start of the year. Commenting on the MNI Chicago Report, Philip Uglow, Chief Economist at MNI Indicators said:

“Activity dropped back in June following the large rise in May. The trend level of the Barometer has picked up since the fourth quarter of 2012, and while these latest data point to some weakening between the first and second quarter, it is too early to say if this will continue.”

The headline says it all. The data was healthy enough as to offer no argument against tapering. Even Consumer Sentiment was not weighed down by rising rates. So the trend of weakness is continuing. 10's shot up to 2.547 before falling back to 2.53, and Fannie 3.5s down 15 ticks to 101-01.

There could be some negative reprice risk for lenders who priced before data, but we would note that they would have put out sheets into a downtrend, and those may have erred on the conservative side in the first place. Best bet: compare them to yesterday's latest to see how much of a half point loss in MBS is reflected.

We would also note that the weakness may already be bouncing. And on that 'note,' keep in mind that tradeflows rule the day more than data (due to month-end), so we could be working out volatility kinks and be gearing up to see tradeflows more meaningfully show their hand. That doesn't necessarily mean "bounce!" but it does mean that strong-ish data doesn't necessarily mean "sell sell sell!"

At this point, those of you with access to yesterday's prices, or who otherwise have overnight price protection, may want to consider getting off the volatility bus. Fannie 3.5s are already down another 6 ticks from the last update not even 15 minutes ago. 10's are up toe 2.532. No telling if data or month-end flows will reverse this momentum, but for now, the trend is NOT your friend. Selling continues.

Bond markets were slightly stronger for most of the overnight session. Most global equities indices rallied in Asian hours and S&Ps extended the rally a bit more during the European session. During that same time, 10yr Treasuries traded a fairly narrow range between 2.47 and 2.45, but as soon as domestic volume started hitting screens, yields moved immediately back to the 2.47 level (which marked s firm floor of resistance yesterday).

This allowed both Treasuries and MBS to open in line with yesterday's closing levels, but today's prices merely waved whilst heading in the other direction. 10's headed higher and are now quickly over 2.515, while Fannie 3.5s are down a quick quarter of a point to 101-07.

The only economic data of the morning is still nearly an hour away (Chicago PMI at 9:45 and Consumer Sentiment at 9:55) and month-end tradeflow considerations will be moving markets before and after that--at times with little regard for logic and certainly with no need to explain themselves. Essentially, the price action in bond markets between now and 3pm is like the letters of a "Price if Right" puzzle being revealed one at a time. It might be progressively easier to think we know what it says as the day goes on, but no way to know for sure until the last letter lights up. For now, we're rejecting the break below 2.47 in 10's and both stocks and bonds are trading in the "QE-off" mentality (stocks lower, bond yields higher).