MBS MID-DAY: Sideways Friday Fizzle

MBS Pricing Snapshot

As the last alert mentioned, Fannie 4.0s could bounce back into the green with just a few ticks of price updates, and that's what's happened. Currently +1 on the day now vs -4 at the time of the last alert, and the bounce looks like it's taking some supportive form in Fannie 3.5s and 10yr Treasuries as well. Negative reprice risk is probably on hold or off the table for most lenders now, but can't be ruled out altogether.

Consumer Sentiment was just slightly stronger than expected, and well within the range of misses/beats typically seen from preliminary to final readings. But whereas 10yr yields have only ticked up 1 bp since the report, Fannie 4.0s look like they've fallen off a cliff--down 7-8 ticks in the blink of an eye.

While MBS may be weaker, this is probably not an accurate representation of where markets would be trading if liquidity was better. In other words, trading levels are significantly distorted by a lack of participation. Unfortunately, this can still affect lender strategy and increase the risks of negative reprices.

We could also see 4.0s bounce back into the green in the next few ticks of price updates.

- Sentiment 85.1 vs 84.0 forecast, and 83.9 preliminary
- Current Conditions 98.6 vs 100.0 forecast
- Expectations 76.5 vs 74.0 forecast
- 1yr inflation expectations 3.1 vs 3.3 preliminary
- Sentiment highest since July 2007

(Reuters) - U.S. consumer sentiment rose in July to the highest level in six years as Americans felt better about the current economic climate, though they expected to see a slower rate of growth in the year ahead, a survey released on Friday showed. The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment climbed to 85.1 from 84.1 in June, topping expectations for 84. It was the highest level since July 2007 and was also an improvement from July's initial reading of 83.9. "This high level of confidence points toward a continued expansion of consumer spending in the year ahead," survey director Richard Curtin said in a statement.

Not that MBS watchers in the US have much reason to be insulted by the overnight session, but those who were more closely tuned in might have been indignant over their decision to do so. Reason being: nothing happened either in terms of movement or underlying events to cause any. In short, traders in Asia and Europe could have taken the day off and it wouldn't have mattered.

The same stands a fantastic chance to be true for domestic traders today, but even with few market participants, there's no unwritten law that says trading levels can't fluctuate. In fact, sometimes lighter liquidity greases the skids for prices to move more rapidly, but so far, we're just seeing mild improvements in the first hour.

2.59 has set itself up as a bit of a technical ceiling for 10yr Treasuries in the low-volume overnight session, and 10's have run just under 2.56 this morning (2.5605 currently). Fannie 3.5s are up 4 ticks to 100-29 and 4.0s are up 2 ticks to 103-29.

The only significant piece of scheduled data is Consumer Sentiment at 9:55am, followed by the less significant (but still a reason for some traders to stay) scheduled Fed Treasury buying from 10:15-11:00am. After that, participation is likely to die down further.