MBS MID-DAY: Back Into Positive Territory Ahead of Auction

MBS Pricing Snapshot

- Single Fam Sales 421k Annual Pace vs 420k forecast
- July revised lower to 390k from 394k
- "West" region -14.6 pct

- Market Reaction: Limited reaction so far, if any reaction at all. Neither Treasuries or MBS have done anything with the data so far, and they can be forgiven for this considering the data was even more equivocal than Durable Goods.

Sales of new single-family houses in August 2013 were at a seasonally adjusted annual rate of 421,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 7.9 percent (±14.6%)* above the revised July rate of 390,000 and is 12.6 percent (±15.3%)* above the August 2012 estimate of 374,000.

The median sales price of new houses sold in August 2013 was $254,600; the average sales price was $318,900. The seasonally adjusted estimate of new houses for sale at the end of August was 175,000. This represents a supply of 5.0 months at the current sales rate.

Treasuries began the overnight session trading flat during Asian hours in quiet trading. Activity picked up somewhat into European hours with stocks and bond yields at 3am, bottoming out by 4am.

Since then, Treasuries have gradually weakened, stopping precisely at overnight high yields, just under 1bps higher than Tuesday's latest yields (currently 2.66%).

The Durable Goods report was actually a net-positive for bond markets, acting to briefly slow down the preexisting selling trend, together with buyers lined up at the 8:20am CME open 10 minutes earlier, but it wasn't enough to turn the very gentle tide of morning selling.

MBS began the day a few ticks into weaker territory and in concert with Treasuries just after 8:20am and similarly began selling with Treasuries just after 8:35am. None of the weakness has been too severe and Fannie 3.5s are actually 1 tick into positive territory at the moment.

The equivocal Durable Goods report places a bit more emphasis on the morning's remaining data, namely, New Home Sales at 10am.

There's an active corporate bond market environment behind the scenes today. The two important phases in corporate debt issuance as far as we're concerned, are "rate-lock selling" (where companies may sell Treasuries to lock in their effective borrowing rate) and "rate lock unwinds" (where companies buy back the Treasuries they sold earlier after the deal has been officially priced).

These phantom forces don't adhere to a set schedule, but can have enough of an impact to dictate pockets of trading activity throughout the day. From here on out, we should see more of the 2nd phase mentioned above (rate-lock unwinds) which would benefit MBS indirectly. This would have to be balanced against any preemptive selling that makes room for the 5yr Treasury auction at 1pm.

- Durable Goods Orders +0.1 vs +0.0 Forecast
- Last month's report revised to -8.1 from -7.4
- Excluding auto sector, orders -0.1 vs +1.0 forecast
- In other words, economists had been expecting orders for manufactured goods to increase by 1 pct when the transportation sector was excluded, but orders instead declined slightly, making the report more mixed than positive.

From the Census Bureau:

"New orders for manufactured durable goods in August increased $0.3 billion or 0.1 percent to $224.9 billion, the U.S. Census Bureau announced today. This increase, up four of the last five months, followed an 8.1 percent July decrease. Excluding transportation, new orders decreased 0.1 percent. Excluding defense, new orders increased 0.5 percent.

" Transportation equipment, also up four of the last five months, drove the increase, $0.5 billion or 0.7 percent to $67.9 billion. This was driven by Motor vehicles and parts, which increased $1.1 billion."