MBS Pricing Snapshot

Bond Markets were weaker overnight led by extensive weakness in German Bunds and other high-quality European debt after Denmark (yes, Denmark... who knew?!) made a change to pension fund rules that affected demand in the European long-end (read more...). German Bunds shot higher in yield when they opened capping a 2 day move over 20bps higher.

Even now, Bunds are resisting the bounce back we've seen in Treasuries which has ushered the 10yr yield from an important pivot point around 1.68 to 1.6471 currently. MBS followed the bounce with Fannie 3.5's getting back into positive territory on the day if only by 2 ticks at 104-23.

It does seem like this morning's generally weaker economic data had a mildly salubrious effect on bond markets, but the reaction was noticeably delayed, and we could just as easily view it as a case of the data "not being enough" to prompt a break over the 1.68+ pivot point in 10's, thus suggesting a technically motivated bounce lower.

Either way, this is a good level of strength ahead of today's 10yr auction, but that auction raises some concern as to how sustainable the strength can be. Seeing as how this one will go off at record low yields and considering the rapid rise in guidance-giving European debt, any strength we can maintain into the auction is a bonus. We wouldn't be surprised to see a more aggressive concession heading into 1pm, which could look something like a re-test of the 1.68's. Incidentally, that major horizontal pivot point is also near the upper boundary of a downward-sloping trend channel, intact since early April. If we find ourselves breaking into the 1.7's today, it's negative mark against the long end of the yield curve and not likely to help production MBS at all. That said, weekend elections and next week's FOMC could completely reverse any swings that look like they might have medium to long term technical significance today.

* PPI - 1.0 pct vs -0.6 pct consensus and -0.2 pct previous
*Core PPI +0.2 pct, same as consensus and previous
* Energy -4.3 pct, most since March 2009

The Producer Price Index for finished goods fell 1.0 percent in May, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Prices for finished goods moved down 0.2 percent in April and were unchanged in March. At the earlier stages of processing, prices received by manufacturers of intermediate goods decreased 0.8 percent in May, and the crude goods index fell 3.2 percent. On an unadjusted basis, prices for finished goods advanced 0.7 percent for the 12 months ended in May, the eighth straight month of slowing year-over-year increases following a 7.0-percent rise for the 12 months ended September 2011.

* Headline Retail Sales down 0.2 pct, as expected
* Excluding autos down 0.4 pct vs 0.0 pct consensus

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for May, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $404.6 billion, a decrease of 0.2 percent (±0.5%)* from the previous month, but 5.3 percent (±0.7%) above May 2011. Total sales for the March through May 2012 period were up 5.7 percent (±0.5%) from the same period a year ago. The March to April 2012 percent change was revised from 0.1 percent (±0.5)* to -0.2 percent (±0.2%)*. Retail trade sales were down 0.2 percent (±0.5%)* from April 2012, but 5.0 percent (±0.7%) above last year. Nonstore retailers sales were up 12.4 percent (±3.1%) from May 2011 and motor vehicles and parts dealers were up 10.0 percent (±2.1%) from last year.