After topping out at 8:54am, bond markets have ebbed in a linear fashion, back in the other direction. Equities rose out of the gate and there's potentially a small bit of intraday stock lever in play, but things have been too disconnected on that front to draw any solid conclusions.

Whatever the case, 10's are up from 1.92 to 1.94 since 8:54am and MBS are down from 102-24 to 102-20. Early rate sheets most likely took their marks with Fannie 3.0s at 102-22, so we're not quite into 'reprice risk territory' yet.

On a final note, the 1.94 area in Treasuries is both an intermediate and intraday pivot point (meaning it's been more likely to result in bounces vs breaks when approached from either side). We've seen a good bit of sideways grind between there and 1.938 in the past half hour so the next break higher or lower by more than a few bps could result in a bit of follow-through momentum (to around 1.955 on the upside and 1.918 on the downside).

The latter could pose problems for MBS, where Fannie 3.0s would stand a good chance to move into negative territory, making reprice risk more of a reality. (hide)

Treasuries spent most of the overnight session in weaker territory before beginning a grind lower in yield in the few hours leading up to the domestic open. Weaker Yen and Japanese government bonds continued to offer pressure during Asian hours, but European markets didn't play their normal role of reversing said weakness.

German Bunds opened weaker and never made up much ground as peripheral markets tightened (read: Spain and Italy yields fell vs German yields, and anything positive for the periphery has tended to be negative for the core). Lower volume due to holidays in Europe greased the skids for volatility, but the first domestic trading of the day reversed the losses

Treasuries turned positive just before 8am and continued lower to 1.92 just before 9am. They've since bounced up to 1.93 as the day gets underway. MBS opened flat to Friday's close and are now up 6 ticks at 102-23.

Stepping back a few feet and filtering out a relative inconsequential overnight session, you could view this morning's market as a moderate push back against a volatile Friday afternoon. That said, with no data on the calendar and plenty of speculation time ahead of Wednesday's FOMC Minutes (and Bernanke testimony in the morning), volatility can't be ruled out. For now though, confirming a supportive bounce at Friday's lows is "so far so good" with respect to the ongoing set-up of the pre-FOMC range. (hide)

All components of the Consumer Sentiment report were stronger than expected, with the headline index rising to it's highest levels since July 2007. Treasuries are 1 bps higher since the data at 1.921 and MBS are down a tick few ticks to 102-29. So far the weakness has been more contained than we'd expect given the magnitude of the beat, but it's too soon to assume this will continue to be the case. Early lenders will face reprice risk if we fall 2 more ticks, and even now, the trajectory of trading could be a concern for the edgiest lenders.

Bottom line: definitely some resilience here, relative the the data, but not without a slight increase in risk. We might squeak by with no reprices, but too soon to be sure. (hide)

- 83.7 vs 78.0 on the headline
- 97.5 vs 89.9 on 'current conditions
- 74.8 vs 68.1 on 'expectations'
- 99 vs 86 on 12 month outlook
- 'current conditions' highest since oct 2007
- 'expectations' highest since nov 2012
- sentiment headline highest since july 2007
(hide)

There wasn't much to write home about in the overnight session. Treasuries traded flat to start and then rallied lower in yield during European hours thanks to stimulus hopes. The ECB is rumored to be consulting banking system participants on the practical effects of a negative deposit rate and several ECB governors were out this morning with varying levels of accommodative hints.

Despite the moderate drift lower in yield, 6:30am saw a bounce at 1.86% for 10's and we've been trending into weaker territory ever since. Factoring out overnight gyrations, charts look like they're simply extending yesterday afternoon's trends. MBS opened right in line with y'day's closing levels and are 5 ticks weaker currently at 102-31. 10's are up 2.5bps at 1.9036.

These are probably the most neutral levels of the week on both sides of the market. Despite the "aw shucks" initial reaction to seeing red on the screens in the morning, if it doesn't extend much past here, it would be a logical and necessary step in the "range-finding" that we're looking for ahead of next week's FOMC Minutes. This could be further confirmed by a near-consensus Consumer Sentiment print (or thrown off by a big beat/miss). 25 minutes to go until that one. Forecast calls for an increase to 78.0 from 76.4 previously (hide)

After topping out at 8:54am, bond markets have ebbed in a linear fashion, back in the other direction. Equities rose out of the gate and there's potentially a small bit of intraday stock lever in play, but things have been too disconnected on that front to draw any solid conclusions.

Whatever the case, 10's are up from 1.92 to 1.94 since 8:54am and MBS are down from 102-24 to 102-20. Early rate sheets most likely took their marks with Fannie 3.0s at 102-22, so we're not quite into 'reprice risk territory' yet.

On a final note, the 1.94 area in Treasuries is both an intermediate and intraday pivot point (meaning it's been more likely to result in bounces vs breaks when approached from either side). We've seen a good bit of sideways grind between there and 1.938 in the past half hour so the next break higher or lower by more than a few bps could result in a bit of follow-through momentum (to around 1.955 on the upside and 1.918 on the downside).

The latter could pose problems for MBS, where Fannie 3.0s would stand a good chance to move into negative territory, making reprice risk more of a reality. (hide)

Treasuries spent most of the overnight session in weaker territory before beginning a grind lower in yield in the few hours leading up to the domestic open. Weaker Yen and Japanese government bonds continued to offer pressure during Asian hours, but European markets didn't play their normal role of reversing said weakness.

German Bunds opened weaker and never made up much ground as peripheral markets tightened (read: Spain and Italy yields fell vs German yields, and anything positive for the periphery has tended to be negative for the core). Lower volume due to holidays in Europe greased the skids for volatility, but the first domestic trading of the day reversed the losses

Treasuries turned positive just before 8am and continued lower to 1.92 just before 9am. They've since bounced up to 1.93 as the day gets underway. MBS opened flat to Friday's close and are now up 6 ticks at 102-23.

Stepping back a few feet and filtering out a relative inconsequential overnight session, you could view this morning's market as a moderate push back against a volatile Friday afternoon. That said, with no data on the calendar and plenty of speculation time ahead of Wednesday's FOMC Minutes (and Bernanke testimony in the morning), volatility can't be ruled out. For now though, confirming a supportive bounce at Friday's lows is "so far so good" with respect to the ongoing set-up of the pre-FOMC range. (hide)

All components of the Consumer Sentiment report were stronger than expected, with the headline index rising to it's highest levels since July 2007. Treasuries are 1 bps higher since the data at 1.921 and MBS are down a tick few ticks to 102-29. So far the weakness has been more contained than we'd expect given the magnitude of the beat, but it's too soon to assume this will continue to be the case. Early lenders will face reprice risk if we fall 2 more ticks, and even now, the trajectory of trading could be a concern for the edgiest lenders.

Bottom line: definitely some resilience here, relative the the data, but not without a slight increase in risk. We might squeak by with no reprices, but too soon to be sure. (hide)

- 83.7 vs 78.0 on the headline
- 97.5 vs 89.9 on 'current conditions
- 74.8 vs 68.1 on 'expectations'
- 99 vs 86 on 12 month outlook
- 'current conditions' highest since oct 2007
- 'expectations' highest since nov 2012
- sentiment headline highest since july 2007
(hide)

There wasn't much to write home about in the overnight session. Treasuries traded flat to start and then rallied lower in yield during European hours thanks to stimulus hopes. The ECB is rumored to be consulting banking system participants on the practical effects of a negative deposit rate and several ECB governors were out this morning with varying levels of accommodative hints.

Despite the moderate drift lower in yield, 6:30am saw a bounce at 1.86% for 10's and we've been trending into weaker territory ever since. Factoring out overnight gyrations, charts look like they're simply extending yesterday afternoon's trends. MBS opened right in line with y'day's closing levels and are 5 ticks weaker currently at 102-31. 10's are up 2.5bps at 1.9036.

These are probably the most neutral levels of the week on both sides of the market. Despite the "aw shucks" initial reaction to seeing red on the screens in the morning, if it doesn't extend much past here, it would be a logical and necessary step in the "range-finding" that we're looking for ahead of next week's FOMC Minutes. This could be further confirmed by a near-consensus Consumer Sentiment print (or thrown off by a big beat/miss). 25 minutes to go until that one. Forecast calls for an increase to 78.0 from 76.4 previously (hide)

MBS had been losing touch with their memories of better times, when they were better able to keep pace with movements in broader bond markets and even outperform them into the beginning of May. Since then, the lower the coupon, the worse the underperformance. This is typical of a negative trend, and it typically turns around when the negative trend ends.

Additionally, lower coupon MBS tend to get a bit panicked if it looks like there's a risk they'll be "left on the island," in a rising interest rate environment. Particularly in 2013, any time 10yr Treasuries make a run toward or over the 2.0% level, this "fear" has been evident in lower MBS coupons (i.e. they lose a lot more ground than higher coupons, and by wider margins than those seen during sell-offs that occurred when benchmark rates are lower).

So when we have days like today (especially when they follow days like yesterday), where 10's are backing down from a run at 2.0%, we can then have afternoons like this one where MBS are making just a bit more progress than benchmarks. It's not a sign of MBS doing anything crazy or unsustainable, but rather a logical result of the supportive bounce in broader markets. It can continue as long as Treasuries don't drive the boat away from our island (head back up over 1.9).

It's like breathing a sigh of relief, and unwinding some of the previous tension. This has been evident not only in the price gains, but also in the speed with which lenders repriced positively today. Ongoing stability keeps positive reprice potential on the table for the rest of the day. Fannie 3.0s are up 20 ticks at 103-10 and 10's are down 7.47 bps at 1.865. (hide)

- Business Conditions -5.2 vs +2.4 consensus, +1.3 previous
- 6-month Outlook 32.3 vs 19.5
- New orders -7.9 vs -1.0 previously
- Employment -8.7 vs -6.8 previously
- Employment index lowest since Sept 2009

Manufacturing firms responding to the monthly Business Outlook Survey suggest that regional manufacturing activity weakened this month. All of the survey’s broadest current indicators were negative this month, indicating weaker conditions compared with April. The survey's indicators of future activity improved, however, and suggest that firms expect overall growth over the next six months.

RTRSThe survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 1.3 in April to -5.2 this month. The current activity index has shown no pattern of sustained growth over the past seven months, generally alternating between positive and negative readings (see Chart). The number of firms reporting decreased activity this month (29 percent) edged out those reporting increased activity (24 percent).

(hide)

Overnight Treasury trading was some of the least eventful of the week with 10's almost perfectly flat during Asian hours. Some weakness crept in to the European session, heading into domestic hours, but never enough to challenge yesterday's high yields.

MBS opened in line with yesterday's close and soon moved quickly higher after all three of the 8:30am economic reports were bond-market-friendly. The gains quickly took Fannie 3.0s to yesterday's highs at 102-28+, where they struggled for nearly half an hour. Over the past 10 minutes, we're seeing them move higher, currently up to 103-31+.

The test of the technical ceiling in MBS coincides with a similar test of an important short term floor in 10yr yields (set by the lows on Monday and Tuesday at 1.893 and 1.895). 10's haven't moved through the floor yet, but did notch down to test it, briefly hitting 1.895. They've since bounced back to 1.90.

All things being equal, it would be nicer to be moving through that floor in 10's, but after 9 days of pain for bond markets, we'll take "possibility" over "pain." Philly Fed data is yet to come at 10am and if it's aligned with the rest of the morning data, we could see a more concerted effort to get to the other side of technicals. Unless that happens, this morning's relative victory may prove to be a bit hollow, especially if it ultimately reinforces the week's floor in yields. (hide)

- CPI -0.4 vs -0.2 f'cast
- Core CPI +0.1 vs +0.2 f'cast
- Annual Core +1.7 vs +1.8 f'cast
- Market Reaction: non-issue, but absence of inflation in general, provides an acceptable environment for QE. In other words, this data doesn't necessarily promote QE, but it has no objections.

The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.4 percent in April on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.1 percent before seasonal adjustment.

As was the case in March, a sharp decrease in the gasoline index was the primary cause of the decline in the seasonally adjusted all items index. The fuel oil index also declined while the electricity and natural gas indexes increased; the net result was a 4.3 percent decrease in the energy index. The food index, unchanged in March, rose 0.2 percent in April.

The index for all items less food and energy increased 0.1 percent in April, the same increase as in March. The indexes for shelter, used cars and trucks, new vehicles, and tobacco all increased in April. These increases were partially offset by declines in the indexes for apparel, airline fares, and recreation.

The all items index increased 1.1 percent over the last 12 months, the smallest 12-month increase since November 2010. The index for all items less food and energy increased 1.7 percent over the span; this was its smallest 12-month increase since June 2011. The food index rose 1.5 percent while the energy index declined 4.3 percent. (hide)

- Housing Starts -16.5 pct vs +5.4 previously
- Unit rate of 853k vs 973k Consensus
- Permits 1.017 mln vs 945k consensus
- Single Fam starts -2.1 pct, Multi -38.9 pct

Privately-owned housing units authorized by building permits in April were at a seasonally adjusted annual rate of 1,017,000. This is 14.3 percent (±1.0%) above the revised March rate of 890,000 and is 35.8 percent (±1.3%) above the April 2012 estimate of 749,000. Single-family authorizations in April were at a rate of 617,000; this is 3.0 percent (±0.9%) above the revised March figure of 599,000. Authorizations of units in buildings with five units or more were at a rate of 374,000 in April.

Privately-owned housing starts in April were at a seasonally adjusted annual rate of 853,000. This is 16.5 percent (±5.2%) below the revised March estimate of 1,021,000, but is 13.1 percent (±5.1%) above the April 2012 rate of 754,000. Single-family housing starts in April were at a rate of 610,000; this is 2.1 percent (±4.8%)* below the revised March figure of 623,000. The April rate for units in buildings with five units or more was 234,000.

Privately-owned housing completions in April were at a seasonally adjusted annual rate of 689,000. This is 14.3 percent (±11.2%) below the revised March estimate of 804,000, but is 3.3 percent (±11.9%)* above the April 2012 rate of 667,000. Single-family housing completions in April were at a rate of 536,000; this is 9.8 percent (±10.2%)* below the revised March rate of 594,000. The April rate for units in buildings with five units or more was 149,000 (hide)

- Claims up to 360k vs 330k consensus
- Continued Claims down to 3.009 mln vs 3.0 forecast, 3.013 previously

- Market Reaction: Positive for both MBS and Treasuries. Fannie 3.0's revisiting yesterday's highs at 102-28.

In the week ending May 11, the advance figure for seasonally adjusted initial claims was 360,000, an increase of 32,000 from the previous week's revised figure of 328,000. The 4-week moving average was 339,250, an increase of 1,250 from the previous week's revised average of 338,000.

The advance seasonally adjusted insured unemployment rate was 2.3 percent for the week ending May 4, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending May 4 was 3,009,000, a decrease of 4,000 from the preceding week's revised level of 3,013,000. The 4-week moving average was 3,015,250, a decrease of 21,000 from the preceding week's revised average of 3,036,250. (hide)

Taking aim at the Fed's MBS buying program is nothing new for Richmond Fed's Lacker, but the current state of the housing market makes for a less tenuous arrow. Can such arrows shoot down well-armored, pro-MBS doves on the voting rotation? Not likely, but to whatever extent the housing recovery becomes bona fide, the argument gains traction.

The X-factor for Lacker could be the ambition on the part of servicers sitting on shadow inventory, gladly watching values and demand rise. Otherwise, the digestion of that inventory would likely whittle this new arrow down to match the ballistic potency of Lacker's typical anti-MBS projectiles, and those have all bounced off.

Here's the Reuters's original coverage of the speech: (Reuters) - An improving U.S. housing market suggests it is time for the Federal Reserve to stop aiming its stimulus at the real estate sector, Richmond Fed President Jeffrey Lacker said on Wednesday.

"When you look at housing market conditions, I think you could make the case that we should be getting out of mortgage-backed securities," Lacker told reporters after a speech.

Lacker, an inflation hawk who has consistently opposed mortgage-backed securities purchases by the central bank, said the process of getting out of the market could be initiated by reinvesting the principal from maturing mortgage bonds into the Treasury market. (hide)

Treasuries and MBS hit their weakest levels of the day at 12:50pm, bringing them close to 'unchanged' on the day. Sinc then, they've been heading back into positive territory with MBS currently trying to get over the 102-22 pivot point shared with yesterday's supportive early afternoon trading. 10yr yields are back down to 1.94 after hitting 1.975 earlier, and stocks have been peeling off their highs from around the same time as well. Negative reprice potential is probably mostly dried up by now (though some lenders come in way late from time to time), and positive reprices are an outside possibility for 'quicker-to-act' lenders who had already repriced for the worse earlier (one reprice already reported). (hide)

- Headline Index at 44 vs 43 forecast and 41 previously
- Current Single Fam sale index 48 vs 44 previously
- Prospective Buyers Index 33 vs 30 previously
- 6 mo outlook index 53 vs 52 previously

- Market Reaction: Not much of a reaction, if any, in bond markets. a correction off the highs of the day was already in the works, but even that has been muted so far. Stocks are slightly higher.

From the NAHB:
Builder confidence in the market for newly built, single-family homes improved three points to a 44 reading on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for May, released today. This gain, from a downwardly revised 41 in April, reflected improvement in all three index components – current sales conditions, sales expectations and traffic of prospective buyers.

“Builders are noting an increased sense of urgency among potential buyers as a result of thinning inventories of homes for sale, continuing affordable mortgage rates and strengthening local economies,” noted National Association of Home Builders (NAHB) Chairman Rick Judson, a home builder from Charlotte, N.C. “This is definitely an encouraging sign even amidst rising challenges with regard to the cost and availability of building materials, lots and labor.”

“While industry supply chains will take time to re-establish themselves following recession-related cutbacks, builders’ views of current sales conditions have improved and expectations for the future remain quite strong as consumers head back to the market in force,” said NAHB Chief Economist David Crowe. (hide)

- April Industrial Output -0.5 vs -0.2 forecast
- Capacity Use Rate 77.8 vs 78.3 consensus

- Market Reaction: new lows for 10's at 1.93 and new highs for MBS at 102-26 (Fannie 3.0s)

Industrial production decreased 0.5 percent in April after having increased 0.3 percent in March and 0.9 percent in February. Manufacturing output moved down 0.4 percent in April after a decline of 0.3 percent in March. The index for utilities decreased 3.7 percent in April, as heating demand fell back to a more typical seasonal level after having been elevated in March because of unusually cold weather. The output of mines increased 0.9 percent in April. At 98.7 percent of its 2007 average, total industrial production was 1.9 percent above its year-earlier level. The rate of capacity utilization for total industry decreased 0.5 percentage point to 77.8 percent, a rate 0.1 percentage point above its level of a year earlier but 2.4 percentage points below its long-run (1972--2012) average. (hide)

Although Treasury yields maintained high yields (around 1.985) through much of the Asian session, the highs also provided a flat ceiling of support. Bonds ultimately pushed lower from that ceiling, even before the European hours as Japanese debt rallied. For the past several sessions, massive sell-offs in Japanese government bonds have been a drag on Treasuries overnight. Today brought news of targeted buying from the Bank of Japan which finally broke the ongoing theme, at least for today.

The first hours of European trading helped solidify the gains in bond markets as German 10's fell around 5 bps, but they bottomed out just after 5am and then went on a tear, erasing all the gains inside 2 hours. Bunds' bounce helped Treasuries hold the ceiling at 1.98 before domestic traders contributed to the rally when they got in for the day, getting 10's back to mid 1.95's before the morning data.

Weaker-than-expected NY Fed Manufacturing (Empire State Survey) helped extend the bounce, which stalled out at 1.935 before heading back up over 1.94. MBS opened a tick into positive territory, and are up 8 ticks currently (half of it before the data, half after) at 102-24. S&P Futures are down about 3 points, but not back to overnight lows.

Next up is Industrial Production at 9:15am and NAHB Housing Market Index at 10am. (hide)

- Headline PPI -0.7 vs -0.6 Forecast
- Core PPI +0.1 vs +0.1 Forecast
- The more closely related to crude oil, the bigger the drop. Energy down 2.5 pct overall with gas down 6.0 and heating oil down 8.8.

- Market Reaction: Empire State Survey is the bigger mover.

The Producer Price Index for finished goods decreased 0.7 percent in April, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Prices for finished goods fell 0.6 percent in March and increased 0.7 percent in February. At the earlier stages of processing, prices received by manufacturers of intermediate goods declined 0.6 percent, and the crude goods index moved down 0.4 percent. On an unadjusted basis, prices for finished goods advanced 0.6 percent for the 12 months ended April 2013, the smallest 12-month rise since a 0.5-percent increase in July 2012. (hide)

- Business Conditions -1.43 vs +4.0 forecast
- Prices Paid and 6-month Outlook were biggest factors
- Market Reaction: helping reinforce moderate bounce back that was already in progress. 10's down to 1.94. MBS up 7 ticks to 102-23.

The May 2013 Empire State Manufacturing Survey indicates that conditions for New York manufacturers declined marginally. The general business conditions index fell four points to -1.4, its first negative reading since January. The new orders index also edged into negative territory, and the shipments index fell to zero. The prices paid index declined eight points to 20.5, indicating a slowdown in selling price increases, while the prices received index was little changed at 4.6. Employment indexes were mixed, showing both a modest increase in the number of employees and a slight decline in the length of the average workweek. Indexes for the six-month outlook were generally lower, suggesting that optimism about future conditions had weakened.

In a series of supplementary survey questions, firms were asked about past and expected changes in both the prices they paid for inputs and the prices they charged their customers. The same questions had previously been asked in surveys conducted in May 2012 and in May of earlier years. In the current survey, respondents, on average, expected the prices they paid to climb by 2.8 percent—the smallest anticipated rise since May 2009. Moreover, the average respondent anticipated an increase of just 1.2 percent in prices received—the smallest expected increase recorded since these questions were first asked in May 2007. (hide)