MBS Pricing Snapshot

The weaker-than-expected Existing Home Sales data provided domestic bond markets with their best boost of the morning. True to recent form, equities participated in the move as well with S&P futures falling on the news. MBS rose several ticks, but remain mostly thwarted by Friday's closing levels at 104-04.

The post-data rally for bond markets looks like it's encountered its most meaningful push back just after 10:30am when equities markets managed to put in their most convincing bounce. The stock lever has been well-connected during earnings season and in the absence of more substantial bond-market-specific guidance. But true to form, bond markets aren't following the same magnitude ebbs and flows of stocks.

MBS are 2 ticks off their highs at 104-03 and 10yr yields have risen merely from 1.8488 to 1.8523. Meanwhile S&P's have risen 3 points from their lows. Morning ranges continue to be narrow, but we've been in slightly better shape thanks to data.

- Existing Sales 4.94 Mln annual rate vs 5.1 consensus
- Down 1 pct vs +4.8 pct consensus
- Inventory Lowest since Jan 2001 in terms of units
- Inventory Lowest Since 2005 in terms of Months of Supply
- 24 pct distressed vs 22 pct in November.
Market Reaction: best volume pop of the domestic session, and thus far, a positive one for MBS and Treasuries. S&P's pulled back 3 points from their morning rally. 10yr yields fell about 1 bp, and MBS added 1-2 ticks. That move appears to be at least pausing for consideration now.

Lawrence Yun , NAR chief economist, said pent-up demand is sustaining the market. "Record low mortgage interest rates clearly are helping many home buyers, but tight inventory and restrictive mortgage underwriting standards are limiting sales," he said. "The number of potential buyers who stayed on the sidelines accumulated during the recession, but they started entering the market early last year as their financial ability and confidence steadily grew, along with home prices. Likely job creation and household formation will continue to fuel that growth. Both sales and prices will again be higher in 2013."

The holiday-shortened week is getting off to a fairly slow start in terms of big-ticket market movers. There are ways--probably fairly accurate ones--to connect the overnight movement in Treasuries to various global economic headlines.

For instance, there was alternating bearishness and bullishness surrounding the Bank of Japan's mostly "as-expected" easing announcement, as well as a bit of response to Germany's ZEW Sentiment survey coming in at the best levels since May 2010. Additionally, a case could be made for a slightly bond-market-bearish reaction to the prospect of the House voting on legislation to extend the debt ceiling deadline on Wednesday.

But these look to be minor ebbs and flows against the broader backdrop, which is mostly informed by technical considerations at the moment. In that regard, nothing has changed from Thursday and Friday where the outer limits of the 3 week trend slightly lower in rates was tested on Thursday morning after the outer limits of a 3 month trend moving toward higher rates was tested at the beginning of the month/year.

Thursday's weakness was a clear, linear continuation of that counter-attack in the sense that bond markets held their ground at slightly better weak points than the last sell-off. In that context, this morning has been rather uneventful as trading has fallen well within the ranges suggested by the longer term trend higher in rates as well as the shorter term push back. More simply both MBS and Treasuries are inside the highs and lows seen Friday.

There's been no significant economic data in the US so far this morning and the morning's only moderately important report arrives shortly with Existing Home Sales at 10am. The consensus calls for a 5.1 million annual rate vs 5.04 million previously.

Fannie 3.0 MBS are down 3 ticks from Friday's close at 104-02 and 10yr yields are up 3bps at 1.87, after trading between 1.83 and 1.875 on Friday. We'd note that we're closer to testing the weaker end of the recent "counter-attack" trend, so any moves higher from here would be an increasing technical concern, with a firm bounce off overnight lows around 1.85/1.86 suggesting the next move would be well into the 1.9's.