MBS Pricing Snapshot

Late day illiquidity is pushing production MBS prices lower following the 3pm Treasury close and Treasuries themselves are leaking higher in yield as the after hours session kicks in. Negative reprices have already been a sort of constant companion since the early afternoon. This most recent jolt of weakness merely keeps that pressure on. Fannie 3.0s fell to 105-03 briefly and are now at 105-04, 1 tick lower on the day.

The Fed's Beige Book typically isn't that interesting, merely serving to recap anecdotes from the Fed's business and industry contacts. Today's really isn't much of an exception and markets aren't doing much with it, but there's perhaps been a bit of a benefit for bond markets and a hit for stocks, though the correlation is microscopic at best.

More interesting than the market's reaction (or lack thereof) is simply the growing body of evidence suggesting that business are concerned about the Fiscal Cliff. While it's somewhat notable that 7 out of 12 regions reported weaker factory activity, 5 of those chalked the weakness up, in part, to the Fiscal Cliff.

As expected, the Book reported some weakness in the New York district due to Hurricane Sandy, but overall, economic activity continued to expand at "a measured pace." Respondents noted that the market for single family homes continued to improve except for the Boston and Philadelphia districts. Keep in mind that the Federal Reserve "districts" aren't limited to the metropolitan area in question. This can account for discrepancies in the apparent health of your local housing market and the Beige Book's anecdotes. The Boston district, for example, is comprised of CT, MA, RI, VT, NH, and ME.

(Reuters) - The chief U.S. housing regulator on Wednesday expressed optimism that the deep downturn in the nation's property market was finally over, but said the future of the government's role in housing finance needed to be settled for long-term health.

"I am cautiously optimistic that the signs of stability - and in some areas, strength - that have started to emerge in certain sectors of the housing market are signals that it is beginning to recover," Edward DeMarco, acting director of the Federal Housing Finance Agency, told the Exchequer Club.

The 5yr Treasury Auction came in better-than-expected with a 0.641 stopping yield versus a 0.649 "when-issued" yield at 1pm. (more on Treasury auction terminology). The bid-to-cover, at 2.89, was similarly stronger than the recent average of 2.86.

Bond markets initially rallied after the results but gains were limited. 10yr yields fell less than 2bps and MBS rose a scant 2 ticks before hitting their head on the same levels that provided a floor heading into the auction. For now, the short term resistance is clearly the 105-06 area for Fannie 3.0s. This lines up well with broader bond market currents which have a resistance level of 1.6147 in terms of 10yr yields.

In other words, "too little too late" is indeed the way things are going for now, and that assessment changes when the aforementioned resistance levels are breached. Fannie 3.0s are currently very close though, at 105-05 and 10yr yields are right on the 1.6147 line as well. Still anyone's game.

President Barack Obama said Wednesday he hoped to reach a deal on the "Fiscal Cliff" before Christmas but insisted that Congress move now to prevent a middle-class tax increase in January. "Let's approach this with the middle class in mind," he said.

To that end, Obama spoke Wednesday with an invited group of Americans who would see their taxes go up if the White House and congressional Republicans are unable to strike a deal before the end of the year.

"Our ultimate goal is to get an agreement that is fair and balanced," the president said in a nationally televised statement from the White House. "My hope is to get this done before Christmas."

"But the place where we already have, in theory at least, complete agreement right now is on middle-class taxes," Obama said. "If Congress does nothing, every family in America will see their taxes automatically go up at the beginning of next year."

There was a bit of "which way do we go" after Obama's political appeal to middle class Americans to Tweet their Congresspeople about resolving the Fiscal Cliff. But we're now seeing the answer is "lower" for MBS, which have now moved to their session lows, down 1 tick at 105-03. Meanwhile, stocks are at their highs, as are Treasury yields with some additional pressure created by the need to take down the 5yr Note auction at 1pm.

Depending on what time of day a particular lender was out with their first rate sheets, we've now crossed into "negative reprice risk" territory. For some lenders, this may not be a foregone conclusion, but the faster-acting lenders could be close at these levels.