MBS Pricing Snapshot

Both MBS and Treasuries moved to weaker territory with the stock market open. Volume has been big as longs have been liquidated in the Treasury complex. 10yr yields are currently testing a breakout of their intermediate term downtrend which runs through the mid 1.86's today. MBS are hovering around a key longer-term support level at 104-02 (update: breaking to 104-00 as I write!).

Most of the incremental weakness had already arrived before lenders released rate sheets, but the environment remains skewed toward weakness. Any additional weakness could begin forming snowballs of more serious sizes for bond markets. We'd stay more defensive than usual when it comes to number of ticks lost between now and rate sheet print times. Trends are ugly.

Overnight Treasuries were choppy in Asian hours, getting an initial boost from the negative reaction to Apple's earnings after the bell, but yields never topped 1.84. As European trading got underway, German Bunds shot a quick 5.3 bps lower at the open, pulling Treasury yields reluctantly lower by the time the domestic session rolled around. Treasuries were a mere shadow of the move in bunds, covering only about half the distance in terms of bps (3 bps rally for 10yr Treasuries vs 5.3 bps in Bunds).

But then there's the domestic economic data... US Initial Jobless Claims have surprised to the downside for the second week in a row. There was no revision to last week's bullish number, and this week's claims were even lower (330k vs 335k last week and 355k forecasts). On a side-note, it's interesting that Claims are in focus after their release, and were also the focus of this morning's commentary.

Despite getting sucker-punched by Claims for the 2nd straight week, bond markets managed to keep losses fairly well contained. That has held mostly true for the past hour, but the 8:58am release of Markit's Purchasing Managers' Index added a bit of insult to injury, showing marked improvements in orders, output, and employment.

That's it as far as scheduled economic data is concerned this morning though there's another round of Fed QE4 buying in Treasuries from 10:15-11:00, and a TIPS Auction in the afternoon (these have been hit and miss as far as market moving potential, so we'd stay aware of the 1pm auction time even if we won't necessarily see any sort of reaction).

Other than that, earnings season continues to provide a good "show" for bond markets--generally lacking in new, informative, data--to observe and occasionally to follow. The "following" occurs primarily between bond markets and equities markets rather than directly linked to earnings strength/weakness. In that regard, US equities are ringing the opening bell presently, and could suggest the next move higher or lower from the impressively supportive perch achieved in MBS and Treasuries despite the bullish data (Fannie 3.0s have held only 3 ticks weaker at 104-08 and 10 yr yields held under 1.845. Sadly, it looks like this figures may look very "dated" very quickly).

- PMI 56.1 vs 53.0 Consensus
- Output 57.2 vs 54.5 in Dec
- New Orders 57.7 vs 54.7 in Dec
- PMI highest since March 2011
- New Orders Highest Since May 2010

From Markit:

• PMI signals strong improvement in manufacturing business conditions during January
• Fastest rise in new orders in 32 months
• Employment growth strengthens further
• Input price inflation slows, but remains marked

The expansion of the U.S. manufacturing sector gained further momentum at the start of 2013, with the Markit Flash U.S. Manufacturing Purchasing Managers’ Index rising to 56.1 in January. Up from 54.0 in December, the ‘flash’ PMI reading, which is based on around 85% of usual monthly replies, signalled the strongest rate of growth since March 2011.

- Claims Fell to 330k from 335k, Consensus 355k
- Previous Week UNREVISED (uncommon)
- 4 Week Average 351.75k vs 360k last week
- Continued Claims 3.157 mln vs 3.2 mln Consensus
- Market Reaction: Big volume pop, but a surprisingly contained move back to unchanged levels after morning strength. This could be temporary, however... Some traders need a few moments to pick themselves up off the floor before selling more MBS and Treasuries.

In the week ending January 19, the advance figure for seasonally adjusted initial claims was 330,000, a decrease of 5,000 from the previous week's unrevised figure of 335,000. The 4-week moving average was 351,750, a decrease of 8,250 from the previous week's revised average of 360,000.

The advance seasonally adjusted insured unemployment rate was 2.5 percent for the week ending January 12, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending January 12 was 3,157,000, a decrease of 71,000 from the preceding week's revised level of 3,228,000. The 4-week moving average was 3,197,500, a decrease of 12,250 from the preceding week's revised average of 3,209,750.