MBS MID-DAY: Last Week's FOMC-Related Weakness Now Erased

MBS Pricing Snapshot

Fannie 3.5s rocketed from 101-03 to 101-12 after big trades came through Treasury futures earlier this morning. Prices have been holding since the 10am Pending Home Sales data, though both MBS and Treasuries are off their strongest levels.

Fannie 3.5s are currently up 4 ticks on the day at 101-10, the same price seen just before last week's FOMC Minutes. 10yr yields are down to 2.737 after bouncing at 2.728.

There's an outside chance that one or two of the earliest-pricing lenders would consider a positive reprice--assuming they based initial rate sheets off MBS prices from the 9am-925am time frame.

- Pending Home Sales -0.6 vs +1.3 Forecast
- Year over Year -1.6, 2nd month of negative reading

Although conditions were mixed across the country, pending home sales continued to move lower in October, marking the fifth consecutive monthly decline, according to the National Association of Realtors.

The Pending Home Sales Index,* a forward-looking indicator based on contract signings, slipped 0.6 percent to 102.1 in October from an upwardly revised 102.7 in September, and is 1.6 percent below October 2012 when it was 103.8. The index is at the lowest level since December 2012 when it was 101.3; the data reflect contracts but not closings.

Lawrence Yun, NAR chief economist, said weaker activity was expected. “The government shutdown in the first half of last month sidelined some potential buyers. In a survey, 17 percent of Realtors® reported delays in October, mostly from waiting for IRS income verification for mortgage approval,” he said.

“We could rebound a bit from this level, but still face the headwinds of limited inventory and falling affordability conditions. Job creation and a slight dialing down from current stringent mortgage underwriting standards going into 2014 can help offset the headwind factors,” Yun said.

On Friday, there was a good discussion in live chat on illiquidity and the incidental price fluctuations it can create. We noted the post-11am trading hours were less than liquid.

Illiquidity and low volume can magnify the effects of trading imbalances. In the case of Friday afternoon, it worked in our advantage as MBS and Treasuries rallied for no apparent reason in much the same way we've seen them sell-off for no apparent reason on occasion. Win some, lose some.

While we wouldn't consider this morning to be a paragon of highly liquid trading, it's better than Friday afternoon. Quite simply, trading levels are shedding the serendipitous Friday afternoon gains as a result.MBS and Treasuries are both perfectly back to the trading levels that prevailed just before Friday afternoon's weird strength kicked in. We said we wouldn't read much into that strength ans this is why.

Fannie 3.5s are down 5 ticks at 101-02 and 10yr Treasury yields are up just over 1bp at 2.7662. The only data on the calendar is Pending Home Sales at 10am. There is a 2yr Treasury auction at 1pm, but it's not that important to MBS and longer-maturity Treasuries.