MBS Pricing Snapshot

This is a bit of a precarious situation for the earliest pricing lenders of the day. Lenders who put rates out around 9:30am Eastern time, did so during the best levels of the session, when Fannie 3.0s hit 103-18. At 103-13, we're technically at some risk of negative reprices from those lenders.

The caveats are that the earlier highs were fairly "spiky" (more frequently hitting 103-16), and the current dip seems to have found at least short term support. While this is far from being confirmed, it lessens the certainty with which we might expect the "early crowd" to reprice. That said, the risks are already increasing.

Holding at 103-13 keeps reprices "possible," while any weakness makes them incrementally more probable with each tick lower. Bounce back to 103-14 or higher would go a long way toward mitigating reprice risk--the sooner the better.

- NMI +56.0 vs +55.0 Consensus, 55.2 Previously
- Highest since Feb 2012
- Business Activity 56.9 vs 56.0 Consensus
- Prices Paid 61.7 vs 58.0 Previously
- Market Reaction: Bond Markets weaker at first, but holding ground inline with previous levels for now.

The NMI™ registered 56 percent in February, 0.8 percentage point higher than the 55.2 percent registered in January. This indicates continued growth at a slightly faster rate in the non-manufacturing sector. This month's reading also reflects the highest NMI™ since February 2012, when the index registered 56.1 percent. The Non-Manufacturing Business Activity Index registered 56.9 percent, which is 0.5 percentage point higher than the 56.4 percent reported in January, reflecting growth for the 43rd consecutive month. The New Orders Index increased by 3.8 percentage points to 58.2 percent, and the Employment Index decreased 0.3 percentage point to 57.2 percent, indicating growth in employment for the seventh consecutive month. The Prices Index increased 3.7 percentage points to 61.7 percent, indicating prices increased at a faster rate in February when compared to January. According to the NMI™, 13 non-manufacturing industries reported growth in February. The majority of respondents' comments reflect a growing optimism about the trend of the economy and overall business conditions.

Some nights are a bit more esoteric when it comes to divining the inspiration for movement while other overnight sessions are fairly cut and dry. Last night was the latter with stronger economic data in Europe and some moderately risk-friendly economic headlines giving a boost to equities and pulling up core bond yields to boot.

The data in this case, was a series of non-manufacturing PMI's--all of which were at least as high as expected, with the UK and Germany expanding. Eurozone Retail Sales also beat expectations (1.2 vs 0.2). Italy's president is considering appointing a government in much the same way that Mario Monti was installed in late 2011, but separate news suggests the outside possibility that the currently divided factions--neither of which holding enough seats in the parliamentary house they failed to win--could come together in some weird and marginally effective way to at least pass some basic legislation. Because this is 'better' than reports of rampant discord and vitriolic backlash, it adds to the risk-on tone for broader European markets. Good for stocks, bad for bonds.

All that having been said, bond markets remain somewhat skeptical of the true efficacy that might be achieved if such a government were cobbled together (either the president-appointed option or the one involving Beppe Grillo). Bond markets may be weaker this morning, but the pall of apprehension surrounding Italy's political fate continues to weigh yields down since the initial reaction to last week's election.

As such, 10 yr yields held their ground relatively well vs hard-charging equities markets overnight. S&Ps are set to open at their highest levels since late 2007, up around 8 points from yesterday's close while 10's are up just over 1 bp. MBS are only 1 tick weaker currently at 103-16 while hitting lows of 103-13+ just after opening.

The only piece of domestic economic data in the US this morning is ISM Non-Manufacturing at 10am. The PMI ("purchasing managers index") is expected to show expansion with a reading of 55.0, which would be roughly in line with last month's expansion (55.2)