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Recap of Yesterday

After experiencing a sizable sell off on Friday, the bond market spent the day yesterday in recovery mode. Prices of U.S. Treasuries rallied across the curve with the long end leading the way. The 10 year TSY note went out +1-00 at 100-26 yielding 2.53% (-11.6bps). The 7 year note was the star performer, rallying 25/32 in price to a yield of 1.969% (-12.3bps).  Trading volume was below average and position squaring/short covering was noted.  Trading volume in stocks was also apathetic, based on my records equity futures experienced their lowest volume day of the year on Globex.  This is indicative of an indecisive market, something that should continue as we draw closer to the release of the Employment Situation Report on Friday.

The day started slow in TBA land as dealers attempted to distribute newly added loan supply inventory in a bid wanted environment, but flows picked up as the day progressed and rate sheet influential MBS coupons eventually recovered from pre-weekend price weakness, giving lenders the opportunity to reprice for the better. The October FNCL 4.0 went out +0-18 at 102-30.  Mortgage spreads widened vs. the long end of the yield curve and against 5s, which is the street's preferred duration adjusted hedge vs. FNCL 4.0s. Here are my 5pm marks vs. the FNCL 4.0: +105.9/10yrTSY, +105.10/10yrIRS, +219.4/5yrTSY.

While new loan supply from originators was meager, below $2bn, about 30% of originator hedges were in 3.5s. When speaking to secondary managers yesterday the clear cut bias was: "I will slowly creep into 3.5s just so I can compete in the 4.25% market, but don't think I'll be going any lower". My advice: slowly add coverage as needed.  This might be as good as it gets people....

Mixed Rate Outlook Provides Perspective: Risk Greatly Outweighs Reward

Overnight Events

* Japan FinMin Govt - BoJ steps should eventually affect market
* Japan FinMin FX moves still one-sided, excessive FX moves undesirable.
* FX Swiss Franc records another record high vs the EUR at 1.2898.
* UK July Mortgage approvals 48,722 vs 48,562 in June, 46,500 exp.
* Russia Rate left unchanged at 7.75%, as expected.
* Eurozone Aug CPI 1.6% vs 1.7% in July, 1.6% exp.
* Eurozone Jul unemployment 10.0% vs 10.0% June, 10% exp.
* German Aug jobless falls 17k m/m, rate steady at 7.6%, in line with exp.
* European credit indices mixed, iTraxx XOver s-13 moves 2 bp higher to 536bps. Main index eases 0.25 bp lower to 119.75 bps. 

Key Events in the Day Ahead

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From Reuters: U.S. home prices likely eked out a small gain in June, but a rise would represent the final tail winds of the homebuyer tax credit that ended in April rather than housing market improvement. Sales have failed to sustain traction in the wake of the federal incentive that drew summer sales forward into spring months. Tepid home buying despite record low mortgage rates, combined with the high hurdle of foreclosure sales, will keep weighing on home prices, economists say.The Standard & Poor's/Case-Shiller 20-city composite home price index likely rose 0.2 percent in June after a 0.5 percent increase in May, seasonally adjusted, according to a Reuters survey.The Conference Board’s consumer confidence index is expected to have edged up to 50.5 for August from 50.4 in July, which was the lowest reading since February. In the July survey, one in six people expected lower income in the next six
months.

EVENTS

• 2:00 Federal Reserve releases minutes of the August 10 FOMC meeting
• 8PM TONIGHT: President Obama will address the nation on the status of the U.S. troop drawdown in Iraq
• FDIC holds its quarterly briefing on bank industry earnings where the agency will reveal how many banks have been added to the "troubled bank list".  FDIC Chairman Sheila Bair will give an update on the health of the banking sector.
  

ISSUANCE

• 11:30 Treasury Auctions $34 bln in 4-week bills
• KDB, benchmark 5-year; Barc/Citi/Credit Agricole; DB/JPM/KDB
• CBA, potential benchmark deal this week; JPM
• Korea Hydro & Nuclear Power Corp, $500m 5-year expected next week;

Ahead of S&P/Case-Shiller and Consumer Confidence...

S&P 500 futures are -4.50 at 1040.50. 1040 is a key support level.

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The 10 year TSY note is +0-16 at 101-10 yielding 2.475% (-5.5bps)...

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The October FNCL 4.0 is +0-06 at 103-03 and the FNCL 4.5 is +0-04 at 104-19. Yield spreads are wider...

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RE: ANOTHER HOME BUYER TAX CREDIT

These comments are from White House Press Secretary Robert Gibbs...

MEDIA QUESTION: A lot of folks have been talking about the first-time home buyers tax credit sort of propping up the housing market.  Is that one of these new measures that he might be considering?

MR. GIBBS:  Look, obviously, there was -- that was something that was done originally.  I don't -- while I have not see, obviously, a final list, that is -- I think bringing that back is not on -- is not as high on the list as many other things are.

Was that a yes or a no?

Sounds like a no to me. My contacts agree....

ps. Today is the last day of the month, that means supportive index extension buying! READ MORE ABOUT MONTH END INDEX EXTENSION

More from MND:

• Pipeline Press: Saturday Lender Updates, Gossip and Interesting Letters from the Trenches
• MBS Commentary: MBS RECAP: 2/10/2012
• Mortgage Rate Watch: Mortgage Rates Battle Back From The Edge
• MND NewsWire: Bernanke Speaks to Home Builders on Housing's Role in Recovery
• Secondary Markets: The Hidden Mortgage Tax and it's Effect on Loan Pricing

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