MBS Pricing Snapshot

It's been a slow-motion reaction to the extra-large 'beat' in Pending Home Sales, but we may be confirming a bounce at the highs. Offsetting the much better-than-expected home sales data has been another dose of Fed speakers jumping in to moderate the market's tapering expectations.

Dudley was first up in this regard, with his prepared remarks hitting at the same time as Pending Home Sales (likely softening the otherwise more bond-bearish blow). In other words, Dudley's reminder that the Fed's withdrawal of QE3 depending on economic conditions and not on calendar dates, as well as his assertion that the Fed would keep most assets on balance sheet for a long time (meaning more accommodation for mortgage markets) was a positive factor for bond prices versus Pending Home Sales being a negative factor.

Fed's Powell was just out in a similar vein, but was less obviously trying to talk markets off the ledge. He even went so far as to argue the other side of the "soothing agenda" by saying that tapering and withdrawal could happen EVEN SOONER if economic conditions warrant. Granted, he was likely trying to emphasize the same point about the decision being "all about economic data," but in so doing, made another statement that stood the risk of spooking bond markets.

Dudley, in his Q&A, which is ongoing, subsequently reiterated the same notion, saying that economic data is MORE IMPORTANT than the risk that tighter financial markets may hurt the economic recovery. In other words--and this is an important point--THE FED IS NOT IN THE BUSINESS OF TRYING TO PREDICT HOW THEIR POLICY CHANGES WILL AFFECT THE RECOVERY! Data first, policy reaction second!

Bond market bulls would hope for something else--perhaps for the Fed to be concerned enough about the recent rise in rates to "do something" about it in the next few months, but Dudley is reaffirming that which we've already harped on. Again, that's "data first, reaction second."

The extent to which that is playing in to the incremental weakness we've seen since 10am is unclear, but there's no need to overcomplicate things. Bond markets hit their best recent levels and then got a healthy dose of bullish economic data. They've since turned a corner and are heading in the other direction. Rate sheets generally came out before that corner was turned, so some negative reprice risk is a factor soon-ish. Fannie 3.5s are off their 101-04 highs, down 6 ticks to 100-30.

Freddie Mac (OTCQB: FMCC) today released the results of its Primary Mortgage Market Survey® (PMMS®), showing average fixed mortgage rates jumping along with bond yields amid recent Fed remarks that it could begin tapering its bond purchases later this year. The average 30-year fixed-rate mortgage rose from 3.93 percent last week to 4.46 percent this week; the highest it has been since the week of July 28, 2011. This represents the largest weekly increase for the 30-year fixed since the week ended April 17, 1987. Despite the recent gains in mortgage rates, homebuyer affordability remains strong for the typical family in most parts of the country, which should help fuel the ongoing housing recovery.

- Pending Sales up 6.7 vs 1.0 consensus
- Highest since December 2006
- 12.1 pct year-over-year

- Market Reaction: In and of itself, this would be a bond-bearish event, but Dudley headlines may be pushing back on the "QE off" movement.

Pending home sales rose in May to the highest level since late 2006, implying a possible spark as mortgage interest rates began to rise, according to the National Association of Realtors®.

The Pending Home Sales Index,* a forward-looking indicator based on contract signings, increased 6.7 percent to 112.3 in May from a downwardly revised 105.2 in April, and is 12.1 percent above May 2012 when it was 100.2; the data reflect contracts but not closings.

Contract activity is at the strongest pace since December 2006 when it reached 112.8; pending sales have been above year-ago levels for the past 25 months.

Lawrence Yun, NAR chief economist, said there may be a fence-jumping effect. “Even with limited choices, it appears some of the rise in contract signings could be from buyers wanting to take advantage of current affordability conditions before mortgage interest rates move higher,” he said. “This implies a continuation of double-digit price increases from a year earlier, with a strong push from pent-up demand.”

MBS opened the day a few ticks into positive territory and hopped on the Treasuries' bandwagon of cautious improvements in the overnight session. 10yr Treasuries had been flat during Asian hours and began falling in yield during European hours while global equities generally advanced (same old "QE on/off" trading pattern that's characterized the past 5 sessions).

both MBS and Treasuries had achieved most, if not all of their current gains by the time the 8:30am data hit. The only discernible reaction was a moderate rally and pull back in line with previous levels. Current 10yr yields are about half a bp lower than 8:29:59 levels and MBS are 1 tick better, putting Fannie 3.5s up 8 on the day so far at 100-31 and 10's at 2.49

The best case we can see for a bond bullish response to the data was the fact that Consumption/Income revisions showed that last month required just slightly more income to achieve just slightly less spending. Revisions were only 0.1 pct in either direction, but it could be worth something on a morning where everything else was in line with consensus.

The next significant data arrives at 10am with Pending Homes Sales as well as Fed-speak from NY Fed's Dudley (more street cred than most Fed speakers). 1pm brings the final Treasury auction of the week with 7yr Notes. So far, so green!

- Consumer Spending +0.3 vs +0.3 forecast
- Previous month revised to -0.3 from -0.2
- Income +0.5 vs +0.2 consensus
- Income revised to +0.1 previously vs +0.0
- Tacit conclusion: even higher income was leading to even less spending than previously anticipated. This may be the most bond bullish factor in the otherwise 'as-expected' morning of data.

Personal income increased $69.4 billion, or 0.5 percent, and disposable personal income (DPI) increased $57.0 billion, or 0.5 percent, in May, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $29.0 billion, or 0.3 percent. In April, personal income increased $18.3 billion, or 0.1 percent, DPI increased $6.5 billion, or 0.1 percent, and PCE decreased $39.6 billion, or 0.3 percent, based on revised estimates.

Real disposable income increased 0.4 percent in May, compared with an increase of 0.3 percent in April. Real PCE increased 0.2 percent, in contrast to a decrease of 0.1 percent.

- Claims 346k vs 345k forecast
- Continued Claims 2.965 mln vs 2.95 mln forecast

Market Reaction: Limited so far, moderately positive for bond markets if anything.

In the week ending June 22, the advance figure for seasonally adjusted initial claims was 346,000, a decrease of 9,000 from the previous week's revised figure of 355,000. The 4-week moving average was 345,750, a decrease of 2,750 from the previous week's revised average of 348,500.

The advance seasonally adjusted insured unemployment rate was 2.3 percent for the week ending June 15, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending June 15 was 2,965,000, a decrease of 1,000 from the preceding week's revised level of 2,966,000. The 4-week moving average was 2,973,250, a decrease of 9,250 from the preceding week's revised average of 2,982,500.