MBS MID-DAY: Fresh 3-Month Highs After Morning Events

MBS Pricing Snapshot

Charts on the MBS Live dashboard convey a seemingly abrupt surge higher after Consumer Sentiment data. While the weaker-than-expected data has had a positive effect for bond markets, that's only a 2/32nds move for Fannie 3.5s. In other words, we're rallying modestly, at the best levels of the day, but not shooting the moon just yet.

Treasuries are similarly at their best levels of the day with 10's down to 2.621. It's worth noting that this is where resistance begins to kick in from a technical standpoint (meaning 2.62-ish has been more likely to result in "bounces" vs "breaks." That doesn't mean it will happen this time--simply that a break would be significant as it would be outside the norm).

The overall Consumer Sentiment Index was revised to a final reading of 77.5 from a preliminary 76.8. Economists surveyed by Reuters had been expecting 78.0.

The internal components of the survey were mixed, with "current conditions" coming in slightly stronger than expected and "expectations" slightly weaker.

Despite the small miss to the downside, the headline is at it's lowest level since April, along with expectations and current conditions. This is providing a boost for bond markets in the immediate wake of the report.

Markets can't help but be painfully aware of the 'government shutdown' debate, and if for no other reason than implications on growth, it's having a moderate positive effect all other things being equal.

Another 'old friend' has reentered the realm of relevance, though we're not sure how long it will be the case. The friend: Italy, or more appropriately, Italian political drama--something that's proven to be a great temporary benefactor of US bond markets. Most recently, ratings downgrade rumors have been swirling and Italian credit spreads gapped out last before and after a rough sovereign debt auction. Treasuries followed that action, albeit indirectly (in that weakening Italian debt caused safe-haven demand for German debt, causing spillover demand for US debt).

Before that, Treasury yields were slightly higher during the Asian hours of the overnight session, but European hours left them in stronger territory heading into 8am. MBS opened a few ticks higher than yesterday as a result.

The morning economic data--Incomes and Outlays--was a non-event, coming in perfectly in line with the forecast. Position-squaring ahead of Monday's 'month-end' session has done more to shape the early price action than anything, though some accounts look to have re-shorted Treasuries this morning after profits were taken at 2.62.

Consumer Sentiment data is next up at 9:55am. Fannie 3.5s are up 3 ticks currently at 101-18 and 10yr yields are down just under a bp at 2.639.

- Spending +0.3, as expected
- Income +0.4, as expected
- Market Reaction: None. Waiting on Consumer Sentiment at 9:55am.

Personal income increased $57.2 billion, or 0.4 percent, and disposable personal income (DPI) increased $56.2 billion, or 0.5 percent, in August, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $34.5 billion, or 0.3 percent. In July, personal income increased $21.2 billion, or 0.2 percent, DPI increased $32.7 billion, or 0.3 percent, and PCE increased $18.3 billion, or 0.2 percent, based on revised estimates

Personal outlays -- PCE, personal interest payments, and personal current transfer payments -- increased $38.4 billion in August, compared with an increase of $22.2 billion in July. PCE increased $34.5 billion, compared with an increase of $18.3 billion.