MBS MID-DAY: Broad-Scale Range Trade Leads MBS to Weaker Levels

MBS Pricing Snapshot

Just a heads-up about a potential shift in tone, or at least a "leveling-off." While this could turn right around and prove to be harmless, the concern at the moment is that Treasuries and MBS have both hit resistance levels, and were unable to break through on the slightly weaker Consumer Confidence numbers.

For Treasuries, the resistance floor is just over 2.57 and is shared with yesterday morning's resistance bounce just before 11am. MBS are running into ceilings from Friday afternoon with Fannie 3.5s topping out at 100-31 and 4.0s at 103-30. Neither are more than 4 ticks from those highs, keeping negative reprice risk at bay for now.

Bottom line, today's range is tight so far, and stands a decent chance of drifting to test it's higher or lower bound. The latter scenario could introduce reprice risk. If Fannie 3.5s break below 100-27 or 4.0s below 103-26, negative reprice risk would be ramping up. There are some supportive pivot points for 10yr yields just overhead so the verdict isn't quite in yet.

- Confidence 80.3 vs 81.4 forecast
- June revised higher to 82.1 from 81.4
- Expectations 84.7 vs 91.1 forecast

Market Reaction: modest improvements in bond markets, but fairly well contained so far. Fannie 4.0s simply revisiting previous highs of the day at 103-29+ and 3.5s are close to their 100-31 highs, currently 100-30. 10yr yields are near lows at 2.576

The Conference Board Consumer Confidence Index®, which had improved in June, pulled back slightly in July. The Index now stands at 80.3 (1985=100), down from 82.1 in June. The Present Situation Index increased to 73.6 from 68.7. The Expectations Index decreased to 84.7 from 91.1 last month.

The monthly Consumer Confidence Survey®, based on a probability-design random sample, is conducted for The Conference Board by Nielsen, a leading global provider of information and analytics around what consumers buy and watch. The cutoff date for the preliminary results was July 18.

Says Lynn Franco, Director of Economic Indicators at The Conference Board: “Consumer Confidence fell slightly in July, precipitated by a weakening in consumers’ economic and job expectations. However, confidence remains well above the levels of a year ago. Consumers’ assessment of current conditions continues to gain ground and expectations remain in expansionary territory despite the July retreat. Overall, indications are that the economy is strengthening and may even gain some momentum in the months ahead.”

- 20 city index +1.0 vs +1.5 forecast
- non-seasonally-adjusted +2.4 vs +2.3
- year over year +12.2 vs +12.4 forecast
- year over year,largest increase since March 2006

Data through May 2013, released today by S&P Dow Jones Indices for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, showed increases of 2.5% and 2.4% for the 10- and 20-City Composites in May versus April. Dallas and Denver reached record levels surpassing their pre-financial crisis peaks set in June 2007 and August 2006.

This is the first time any city has made a new all-time high. The 10- and 20-City Composites annual returns rose slightly from April to May as they posted the best year-over-year gains since March 2006. All 20 cities increased from May 2012 to May 2013 and from April 2013 to May 2013.

“Home prices continue to strengthen,” says David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices. “Two cities set new highs, surpassing their pre-crisis levels and five cities – Atlanta, Chicago, San Diego, San Francisco and Seattle – posted monthly gains of over three percent, also a first time event.

“The Southwest and the West saw the strongest year-over-year gains as San Francisco home prices rose 24.5% followed by Las Vegas (+23.3%) and Phoenix (+20.6%). New York (+3.3%), Cleveland (+3.4%) and Washington DC (+6.5%) were the weakest. Monthly numbers before seasonal adjustment showed all 20 cities experienced rising prices. San Francisco (+4.3%), Chicago (+3.7%) and Atlanta (+3.4%) were the leaders. However, two cities – Cleveland and Minneapolis were down slightly after seasonal adjustment.

Bond markets are in slightly stronger territory this morning after another exceptionally quiet overnight session. The biggest directional move in 10yr yields was a modest 2bps, with the range generally holding inside 2.58-2.60. Volumes were light as well, adding to the sense that traders aren't eager to over-commit in either direction ahead of Wednesday's epic batch of data.

The flatness wasn't for lack of data/events. China conducted its first money market injection since February, Germany's GFK Sentiment index beat forecasts, Spain's GDP moved from -0.5 to -0.1, and Italy had a successful bond auction despite concerns that this week's trial of Berlusconi could cause legislative challenges.

So far this morning, domestic trading has been generally friendly for Treasuries and MBS as some early month-end buying offers a supportive tone for prices. That said, the moves remain modest with 10's down only 1.7 bps at 2.582 and Fannie 4.0s up 2 ticks at 103-28. Fannie 3.5s are faring slightly better, up 5 ticks at 100-29.

The first data of the morning is coming up in 3 minutes with Case-Shiller Home Prices and an hour later, Consumer Confidence is expected to come in at 81.4.