MBS MID-DAY: Near Lows Heading Into Auction; Reality Bites

MBS Pricing Snapshot

- Sales 497k (most since May 2008) vs 482k forecast
- Last month revised from 476k to 459k - Margin of error: ±20.5% - 3.9 Months Supply vs 4.2 Months in May
- Median Price $249,700 vs $232,600 last year

Market Reaction: How do you take a report too seriously that admits it has over a 20% margin of error and where last month's revision is bigger than this month's beat? (in other words, if this report is revised by as much as the last one, it would have missed the mark today. Keep in mind that this data is based on signed contracts and not actual closings. While this helps explain why the margins of error can be so wide, it also makes any bullish readings suspect in this interest rate environment. The flat bond market reaction may reflect that skepticism).

Sales of new single-family houses in June 2013 were at a seasonally adjusted annual rate of 497,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 8.3 percent (±20.5%)* above the revised May rate of 459,000 and is 38.1 percent (±22.0%) above the June 2012 estimate of 360,000.

The median sales price of new houses sold in June 2013 was $249,700; the average sales price was $295,000. The seasonally adjusted estimate of new houses for sale at the end of June was 161,000. This represents a supply of 3.9 months at the current sales rate.

- PMI 53.2 vs 52.5 consensus
- Employment 52.6 vs 49.9 previously

- Market Reaction: Initially weaker, but bond markets have bounced just slightly since then. Still much weaker overall.

The Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™)1 picked up to a four-month high in July. Having risen to 53.2 from 51.9 in June, the flash PMI index, which is based on approximately 85% of usual monthly replies, suggested that growth of the manufacturing sector quickened to a moderate pace.

The volume of new work received by manufacturers continued to rise in July, with the latest increase solid and the greatest since March. Panellists generally commented on greater client demand and improved market conditions at the start of the third quarter.

Although the increase in total new orders generally reflected higher new work intakes domestically, new export orders also rose in July. The modest expansion of new export work followed contractions in the previous two months.

Whereas the most highly regarded 'Purchasing Managers' Index' in the US is put out by ISM, Markit compiles PMIs for countries worldwide, including one for the US (that tends to line up well with ISM). Stronger than expected European PMIs fueled overnight weakness in bond markets with France, Germany and Eurozone readings all coming in higher. German Bunds led the way higher and Treasuries followed into the domestic session.

Things have broken down further since then for several reasons. First, there's the technical resistance at 2.46, or rather, there's the fact that we've spent the last two weeks unable to break below 2.46, but have continued to try. That's the sort of thing that only happens for so long before yields move in the other direction. Overnight weakness also triggered the same old chain reactions (or "snowball selling") that we often see when recently supportive levels are broken--in this case, 2.55, give or take.

MBS are along for the ride this morning, but definitely participating with 3.5s down 19 ticks at 100-19 and 4.0s down 14 ticks at 103-22. In the absence of ISM numbers, traders are more willing to pay attention to the Markit PMI numbers that were slightly stronger than expected for the US. The employment component moved back over 50.0 as well, adding another positive anecdote for next week's important employment data.

The only scheduled data left this morning is New Home Sales at 10am. The 5yr Treasury auction hits at 1pm, and the morning's weakness could be moderately exacerbated by the need to build in a concession for that supply. All that having been said, buyers look to be stepping in to support the most recent batch of weakness, but with less than 15 minutes gone by since the data, we'll watch that with crossed fingers for now. 10's are at 2.574 after hitting 2.595 just moments ago.