MBS MID-DAY: Moderate Pressure; Mostly Holding Ground

MBS Pricing Snapshot

Fannie 4.0s met with good buying at 103-27 and Fannie 3.5s just under 100-20. 10yr yields are back to the very edge of their 2.655 pivot point and the reprice risk situation is generally improving (toward neutrality) at the moment. We're not all the way out of the woods, but things are looking better than they were half an hour ago.

It's too soon to know how the current move will play out, but so far, we have 10yr yields breaking above their technically supportive "mid 2.65's" zone (currently up to 2.663) and MBS following with their own break to the day's weakest levels. Fannie 3.5s are down 4 ticks at 100-22, but the lack of liquidity is important to note here. Prices are notional until something actually trades (because price indications are fueled by quotes). Fannie 4.0s are down 3 ticks on the day at 103-27, and liquidity is a bit better here.

Either way, we know bond markets are moving weaker and stocks are selling off as well. We're approaching the edge of negative reprice risk for lenders who were out early with rates, but emphasis is on the "edge" vs the 'approach.' Essentially, negative reprices have gone from "unlikely" to "possible."

Italy's and the the UK's Industrial Production numbers were much higher than expected. Italian GDP was close to consensus. German Industrial orders were much stronger than expected. The US Trade Deficit came in much lower than expected (lowest in 3.5 years with exports at an all time high), and MBS are unchanged from yesterday's close.

In Shakespeare's words, the overnight and early morning session was 'full of sound and fury, signifying nothing.' The broader story is not one of several competing, important market movers miraculously adding up to 'unchanged,' but rather, markets simply don't care. Treasuries haven't yet left a range that was set in 1.5 hours of trading yesterday afternoon.

If anything, the trend has been slightly weaker since US traders sat down, but unless overnight highs of 2.66 are broken, that weakness looks more like a decision to hold the range than a concerted move to break it on the other side. The weakness existed before and after the Trade data, and the two have nothing to do with each other.

The only moderately significant item left on today's calendar is the 3yr Auction at 1pm, and calling it significant is a stretch. Very slow morning.

Fannie 3.5s and 4.0s are both down 1 tick from yesterday's latest levels at 100-25 and 103-29 respectively. 10yr yields are bouncing at their favorite ceiling since last Friday's jobs report, 2.655.

- June Trade Gap $34.22 bln vs $43.5 bln consensus
- Exports +2.2, Imports -2.5 percent
- Goods deficit $53.16 bln
- Services Surplus record high $18.94 bln
- Overall deficit smallest since 10/2009
- Exports highest on record

Market Reaction: Sounds important, but the message from tradeflows after the data is says otherwise. This report doesn't readily translate into a commentary on the Fed's tapering schedule. Bond markets seem confused by this. Treasuries and MBS are within a tick of flat on the day.

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total June exports of $191.2 billion and imports of $225.4 billion resulted in a goods and services deficit of $34.2 billion, down from $44.1 billion in May, revised. June exports were $4.1 billion more than May exports of $187.1 billion. June imports were $5.8 billion less than May imports of $231.2 billion.

In June, the goods deficit decreased $9.7 billion from May to $53.2 billion, and the services surplus increased $0.2 billion from May to $18.9 billion. Exports of goods increased $4.0 billion to $134.3 billion, and imports of goods decreased $5.7 billion to $187.4 billion. Exports of services increased $0.1 billion to $56.9 billion, and imports of services were virtually unchanged at $38.0 billion.

The goods and services deficit decreased $8.2 billion from June 2012 to June 2013. Exports were up $6.0 billion, or 3.2 percent, and imports were down $2.3 billion, or 1.0 percent.