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MBS MID-DAY: Europe Takes Bite Out Of Bond Prices, Now Sideways Ahead Of Auction
Posted to: MBS Commentary
Thursday, January 10, 2013 11:09 AM

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MBS Live: MBS Morning Market Summary

The story so far this morning is as simple as the headline, with the slight addendum being that Chinese economic data actually began the push toward higher yields overnight.  But it was indeed Europe which has had the biggest impact so far.  The troubles began in mild fashion with a strong Spanish debt auction.  When US Treasuries have strong auctions, it's good for yields.  Same story with German debt auctions...  But the European periphery is more of a proxy for the other side of the risk equation.  

When bond auctions in Spain (or Italy, or Greece, et. al) are well-bid, it's generally a net-negative for the so-called "core" debt issuers.  The biggest hits are typically taken by the biggest representative of the core: Germany.  German Bunds were already weakening significantly overnight, but US Treasuries were doing a fair job of avoiding the spillover.  After the ECB announcement and throughout Draghi's press conference, Bunds tanked severely, the Euro skyrocketed, and US debt merely followed a small portion of that movement.  

All things considered, to have only sold off to roughly a 1.90% level in 10yr yields is pretty uneventful.  Unfortunately, it comes at a time where 10's were hoping to break back below a critical long-term inflection zone in the mid 1.8's.  This is not helping.  The 30yr Bond Auction at 1pm can either add to this pain or mitigate it.  This will be an "either/or" sort of thing with respect to MBS holding their 2-day lows around 104-10, though lenders should be generally less quick to reprice positively given that today is the roll.

 
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
FNMA 3.0
104-11 : -0-08
FNMA 3.5
106-05 : -0-05
FNMA 4.0
106-25 : -0-05
FNMA 4.5
107-27 : -0-03
GNMA 3.0
105-11 : -0-10
GNMA 3.5
108-02 : -0-05
GNMA 4.0
109-07 : -0-05
GNMA 4.5
109-09 : +0-01
FHLMC 3.0
103-30 : -0-08
FHLMC 3.5
105-29 : -0-03
FHLMC 4.0
106-14 : -0-04
FHLMC 4.5
106-30 : -0-05
Pricing as of 11:09 AM EST
Morning Reprice Alerts and Updates
Below is a recap of instant Reprice Alerts and updates issued via email and text alert to MBS Live subscribers this morning.

10:21AM  :  ECON: Wholesale Sales Rise Most Since 3/11, Inventories Slightly Higher
- Inventories +0.6 vs +0.3 Consensus
- October revised lower from .6 to .3
- Sales +2.3 pct vs +0.6 Consensus
- October sales revised to -0.9 from -1.2
- Sales see largest rise since March 2011
- What this all means: nothing... Not inasmuch as today's trading activity is concerned. It's a 2nd to 3rd tier piece of stale economic data that struggles to impact even calm, bored markets, let alone markets that are reeling from bullish ECB announcements and technical bounces. But it's a piece of scheduled economic data, so here it is:

The U.S. Census Bureau announced today that November 2012 sales of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations and trading-day differences but not for price changes, were $419.3 billion, up 2.3 percent (+/-0.5%) from the revised October level and were up 5.6 percent (+/-0.7%) from the November 2011 level. The October preliminary estimate was revised upward $1.3 billion or 0.3 percent.

. Total inventories of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations but not for price changes, were $498.9 billion at the end of November, up 0.6 percent (+/-0.4%) from the revised October level and were up 7.0 percent (+/-1.2%) from the November 2011 level. The October preliminary estimate was revised downward $1.0 billion or 0.2 percent.
10:10AM  :  ALERT ISSUED: Bond Markets Finally Make A Break, But In Wrong Direction
After three sessions of eerily calm and slightly positive trading, bond markets are getting back to the brisker moves that characterized last week's rout. Unfortunately, the brisk moves are, once again, in an unfriendly direction, bringing 10's back to the edge of 1.9's.

The strain and pain began mainly in Spain. Well... Not really, but a stronger than expected Spanish debt auction added to pressure already in place from stronger Chinese export data. The bigger kick whilst down came from another generally rosy Press Conference with ECB Pres Draghi that began concurrently with the Jobless Claims report at 8:30am.

Claims, though higher than expected, were a complete non-issue this morning, and markets are clearly pre-occupied with two much bigger issues: trading global central bank policy and keeping pace with tradeflows/technicals.

The ECB stuff is easy enough to understand. The ECB didn't lower rates, didn't take the deposit rate into negative territory (both of which were speculated), and Draghi was on record with all manner of economically bullish anecdotes. These included mention that that he didn't see need for any further easing and that the ECB merely needed to "see signs of a recovery" before an exit from accommodative policy (that's a big jump from the US Fed's stance on keeping accommodation in place until well into the recovery).

The tradeflow/technical picture is also fairly straightforward, provided you're up to speed on the long term significance of the mid 1.8's zone in 10yr yields. With some exceptions, it's been the dividing line between the past 7 months of bond market repression and the previous 7 months of "only moderate repression."

Failure to break definitively back underneath 1.865 yesterday was bad enough, but this morning's bounce up to 1.90+ is ominous. Markets are attempting to convince us that the long term interest rate lows are in as of mid 2012, and to confirm that possibility with a sustained break over the inflection point in the mid 1.8's. Scary times...

Intraday yields were as high as 1.975 last week, so we got that going for us. If we don't sell off another 7 bps today, we'd at least have a "lower high" coming down from there, but the bigger deal is likely still the 1.86+ break. It was a ceiling before, and now to see it acting as a floor (providing a bounce even...) is very unfriendly from a technical perspective.

Fannie 3.0s are down 9 ticks at 104-10 and 10yr yields are currently up 4.5 bps at 1.9047. The next biggie this afternoon is the 30yr Bond auction, but we're not sure that has the potency to spark a move back under 1.865 unless we were to start moving that direction now, and for other reasons. As of now, we're just edging into the weakest levels of the morning. There's even a slight risk that the earliest priced lenders are already considering a negative reprice.
8:37AM  :  ECON: Jobless Claims Slightly Higher Than Expected
- Claims 371k vs 365k Consensus
- Continued Claims fell 127k, largest drop since Jan 2011
- Continued Claims lowest since July 2008

In the week ending January 5, the advance figure for seasonally adjusted initial claims was 371,000, an increase of 4,000 from the previous week's revised figure of 367,000. The 4-week moving average was 365,750, an increase of 6,750 from the previous week's revised average of 359,000.

The advance seasonally adjusted insured unemployment rate was 2.4 percent for the week ending December 29, a decrease of 0.1 percentage point from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending December 29 was 3,109,000, a decrease of 127,000 from the preceding week's revised level of 3,236,000. The 4-week moving average was 3,197,250, a decrease of 26,000 from the preceding week's revised average of 3,223,250.
Live Chat Featured Comments
A recap of the featured comments from the MBS Live Dashboard's Live Chat feature, utilized by hundreds of industry professionals each day.

Jason York  :  "the public will be happy with these widesweeping protective changes until they try and go get a mortgage! Then they'll be complaining that things are too tough, which is our fault again"
Jason York  :  "possibly the latter? You have to understand, most of this stuff is being done by politicians, not people that understand how everything actually works in the mortgage industry. The politicians just want to be able to say, hey look, I just helped draft so regs to stop the big bad mortgage industry from charging people a bunch of fees. You're welcome America!""
Andrew Horowitz  :  "the late day rally yesterday was smoke and mirrors guys"
David Silvernail  :  "So why down then if claims were higher than exp"
Ted Rood  :  "How long till Congress comes down on lending industry for failing to offer equal housing opportunities due to QM?"
Andy Pada  :  "Honestly, I should stop being a mortgage banker simply concentrate on practicing law. Seems like every rule or regulation in this field will require legal counsel and advice."
Andrew Horowitz  :  "even the reference of subprime so many times in this piece of literature that they published is comical"
Andy Pada  :  "Just so I understand, what is the purpose of a Qualified Mortgage (QM)? Is it presumably a safeguard against litigation regarding ability to repay?"
Gus Floropoulos  :  "more like embarrassing"
Matthew Graham  :  "what we have now, 5 years after the brunt of the collapse, borders on insulting and comical. "
Matthew Graham  :  "You could have assembled a very small task force of savvy originators in 2005-2006 and been done with this in 3 days, possibly preventing a measurable portion of the pain that was yet to come."
Chris Kopec  :  "Imagine what a MBS Fraud Perp Walk would have accomplished instead of all these backward-thinking regs that simply box consumers out of the market."
Andrew Horowitz  :  "as a friend of mine just put it "this is like the governement developing a plan to protect the World Trade Center" "
Ira Selwin  :  "Also, you can watch at 11am here http://www.ustream.tv/channel/cfpblive"
Christopher Stevens  :  "according to the WSJ roughly three qrts of all loans in 2011 had a 43% dti and met most of the QM characteristics. An additional 20% of loans that were above 43% dti met the second test of AUS approval"
Ira Selwin  :  "It is not detailed in the sheet, but I believe they were mentioning how certail products (harp, stramline, etc...) would be exempt"
Ira Selwin  :  "in terms of ability to pay you mean?"
Roger Moore  :  "has anybody mentioned how this would affect fha streams and irrrls?"
Matthew Graham  :  "RTRS- ECB'S DRAGHI - ASKED IF ECB COULD DO MORE LONG-TERM OPERATIONS, SAYS WE BELIEVE FUNDING CONDITIONS NOW ARE SATISFACTORY "
Matthew Graham  :  "Here, we have an FOMC that says easing will continue well into the recovery, but across the pond, we have an ECB saying they merely need "signs of recovery" before exit. Cue more selling pressure...."
Matthew Graham  :  "RTRS- ECB'S DRAGHI - YOU NEED TO SEE SIGNS OF RECOVERY BEFORE EXIT "
Matthew Graham  :  "RTRS - DRAGHI SAYS ECB INTEREST RATE DECISION WAS UNANIMOUS "
Matthew Graham  :  "they also stated there's a 2nd "backup" rule that allows for over 43, to be phased out with conservatorship termination or 7yrs, whichever comes first."
Ira Selwin  :  "Maybe, but that's a separate topic. They did state in the QM rules, that the 43% won't apply to AUS/Scorecard"
David Gaffin  :  "I can live with the new provisions I believe, the biggest impact for me being limited to 43%."
Matthew Graham  :  "RTRS - DRAGHI BEGINS NEWS CONFERENCE AFTER ECB LEFT INTEREST RATES UNCHANGED AT 0.75 PCT "
Victor Burek  :  "wow..the first revision lower in ages"
Matthew Graham  :  "RTRS- US JOBLESS CLAIMS ROSE TO 371,000 JAN 5 WEEK (CONSENSUS 365,000) FROM 367,000 PRIOR WEEK (PREVIOUS 372,000) "
Christopher Stevens  :  "What interests me most about the QM release is they still can't figure out LO Comp as it relates to points/fees"
Victor Burek  :  "realistically we closed at 104-14, and no lender priced anywhere near the 104-18"

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