MBS MID-DAY: Bond Markets Stick to Plan Ahead of Fed

From this morning's MBS Live Update: The inevitable pall of silence leading up to FOMC Wednesday is much more evident this morning, without the distortion of unexpected headlines (Summers withdrawal). Bond markets were slightly stronger overnight, and paid little heed to normally correlated markets. Treasuries paid more attention to technical levels than to fundamental events, and they displayed a marked desire to trade increasingly narrow ranges compared to German Bunds.

As the day has progressed, bond markets took a turn for the worse before getting more than halfway back to yesterday's levels, but since then, they've opted to hold to 'the plan'--which is to generally be grinding sideways inside range boundaries rather than making forays into recently unexplored territory. 

MBS Pricing Snapshot

- Housing Market Index at 58 vs 59 forecast, 58 previously
- Prospective Buyer index 47 vs 46 previously, highest since October 2005

Market Reaction: Not a big market mover, but not getting in the way of the selling trend in place since 9am.

Following four consecutive months of improvement, builder confidence in the market for newly built, single-family homes held unchanged in September with a reading of 58 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today.

“While builder confidence is holding at the highest level in nearly eight years, many are reporting some hesitancy on the part of buyers due to the sharp increase in interest rates,” said NAHB Chairman Rick Judson, a home builder from Charlotte, N.C. “Home buyers are adjusting to the fact that, while mortgage rates are still quite favorable on a historic basis, the record lows are probably a thing of the past.”

“Following a solid run up in builder confidence over the past year, we are seeing a pause in the momentum as consumers wait to see where interest rates settle and as the headwinds of tight credit, shrinking supplies of lots for development and increasing labor costs continue,” noted NAHB Chief Economist David Crowe.

Fannie 4.0s are now 5 ticks lower from the prices at which some lenders may have taken initial marks for rate sheets. This just barely introduces the possibility of an early negative reprice or two, but only from the lenders who were out early with rate sheets.

As a point of order, we'd note that bond markets are weaker after NAHB, but not necessarily because of it. Things had been trending in this directly beforehand. 10's are up to 2.8606 and Fannie 4.0's are up 1 tick on the day (previously up 6) at 102-29.

The inevitable pall of silence leading up to FOMC Wednesday is much more evident this morning, without the distortion of unexpected headlines (Summers withdrawal). Bond markets were slightly stronger overnight, and paid little heed to normally correlated markets. Treasuries paid more attention to technical levels than to fundamental events, and they displayed a marked desire to trade increasingly narrow ranges compared to German Bunds.

As far as the boundaries of that pre-FOMC range are concerned, yesterday made things pretty easy by providing a clear set of low yields which are currently seen as "too low" (because we got there via snowball rally). High yields from late last week are similarly "too high" as they don't account for whatever small benefit it is to have Summers out of the running for Fed Chair.

After yesterday afternoon's sell-off, markets were ready to concede this a bit. Stocks and bonds both put an end to their respective sell-offs and held mostly flat overnight.

CPI data was relatively uneventful, but certainly didn't close the door to slightly improved levels. 10's are down 1.6bps at 2.846 and Fannie 4.0s are up 5 ticks at 103-01. The only remaining data for the day is NAHB's Housing Market Index at 10am.

- CPI +0.1 vs +0.2 forecast
- Core CPI +0.1 vs +0.1 forecast
- Annual Core CPI +1.5 vs +1.6 forecast
- Market Reaction: Slight improvement for MBS, Treasuries, and stocks, as the default implication of lower-than-expected inflation metrics is an increasingly open door for ongoing QE, all things being equal.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in August on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.5 percent before seasonal adjustment.