MBS Pricing Snapshot

One of the most interesting developments following the EU news overnight was that 10yr European benchmark yields rose above US 10yr Treasury yields for the first time since February. More so than the Euro or the Stock lever or even just the general "risk-on" trade, US Treasuries mirror and match German Bunds (European Benchmark). So there was quite a bit of pressure for 10's to re-test the ceiling of supportive levels in the high 1.6's. as Bunds themselves hit the high 1.6's.

But thus far, domestic bond markets have done an admirable job of holding their ground vs the general currents of the "risk-on" trade. And now that Bunds are easing lower from their late European session highs, US Treasuries have backed down from their highs of the morning as well--all this despite advancing stocks and Euros.

MBS generally approve of the ground-holding and are very close to regaining the lower levels of yesterday's range. Bottom line for now is that 102-13 to 102-14 has been supportive all week in Fannie 3.0s, getting attention on Tuesday, Wednesday, and again this morning. Just like 10yr Treasuries are contending with an intermediate pivot point around 1.645 before going lower, so too are Fannie 3.0's contending with their overhead pivot at 102-22.

Both of these are somewhat blurry lines in the sand that will help us assess any ongoing positivity. "Blurry" because there's no good specific level to assign to either pivot point. For 3.0's, it's more like 102-22 to 102-24 and for 10's 1.64 to 1.65. Anything INSIDE those ranges is positive, but equivocally so.

A break through to stronger territory would be significantly more positive whereas a firm show of resistance would be the first warning sign of further weakness, but that weakness would need to be confirmed by follow-through selling that takes Fannie 3.0's through 102-13 and 10yr Treasury yields above 1.69 before we'd be too concerned that the "new sideways" range is at risk. Otherwise, every passing minute is confirming the "new sideways."

10yr yields are currently down to an impressive 1.6483 and Fannie 3.0's back up to 102-21. Very good, even if not great, all things considered.

- Headline Sentiment 73.2 vs 74.1 consensus
- 'current conditions' 81.5 vs 82.1 consensus
- 'consumer expectations' 67.8 vs 69.0 consensus
- 12 month outlook 79 vs 82 consensus
- 1-yr inflation expectations 3.1% vs 3.0 consensus
- 5-yr inflation expectations 2.8% vs 2.9 consensus
- sentiment, conditions, expectations lowest since December

(Reuters) - Consumer sentiment dropped to a six-month low in June as Americans' view of the economy soured, a survey released on Friday showed. The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment fell to 73.2 in June from 79.3 in May.

It was the lowest level since December and fell short of economists' expectations for the index to hold at the same level as June's preliminary reading of 74.1.

The deterioration in consumers' attitudes came mostly from households with incomes over $75,000; sentiment among lower-income households was little changed, the survey said. "While the overall level of consumer sentiment is substantially above last summer's low - which would normally indicate a growth slowdown, not a downturn - the buying plans of upper-income households have also sharply declined," survey director Richard Curtin said in a statement.

"Since these households account for a large share of total spending, if the declines continue in the months ahead, it could have a substantial impact on total spending."

* 52.9 Headline vs 52.5 consensus and 52.7 last month... not the sort of deviations that will inspire bond markets much this AM...

From ISM-Chicago:

The Chicago Purchasing Managers reported the June Chicago Business Barometer stabilized just above May's 33 month low. The short-term trend of the Chicago Business Barometer fell for the third month. The three-month moving average of each Business Activity index, except Employment, fell in June. Prices Paid were at a 30 month low. New Orders and Order Backlogs were at their lowest since September 2009.

Bond markets continue to trade in weaker territory after this morning's first round of domestic economic data proved to be of little interest compared to overnight events. The key market mover so far today is the agreement reached at the EU Summit (after much wailing and gnashing of teeth from Spain and Italy) that will allow Europe's permanent bailout fund, the ESM, to recapitalize banks without increasing a country's budget deficit and without taking preferential status over the country's other bondholders.

The Euro shot sharply higher following the announcement in the wee hours of the morning and everything else has followed in a "risk-on" direction. 10yr yields have seen their sharpest upward movement since the Greek elections and S&P futures are close to 25 pts higher.

MBS are outpeforming noticeably with Fannie 3.5s down only 10 ticks on the day at 105-00, a familiar support level of late and Fannie 3.0's are down 13 ticks at 102-15, roughly in line with Wednesday's lows. 10yr yields currently trade in the mid 1.67's which marks the beginning of some critical "line in the sand" territory that stretches up to 1.69.

Current trading movements are less about "stuff" that's happening right now and more about sorting out the reaction to the overnight news, as well as simply letting the technical and flow-based trading considerations run their course. If bond markets are able to dig in and hold ground at current levels, it would be a profound statement reinforcing the "new sideways" range from 1.68 to 1.56 (plus or minus a bp on either side).

* Both Incomes and Outlays as expected. No real surprises in the report. Markets continue to be more interested in Europe.

From the BEA:

Personal income increased $25.4 billion, or 0.2 percent, and disposable personal income (DPI) increased $18.5 billion, or 0.2 percent, in May, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $4.7 billion, or less than 0.1 percent. In April, personal income increased $29.4 billion, or 0.2 percent, DPI increased $19.5 billion, or 0.2 percent, and PCE increased $16.2 billion, or 0.1 percent, based on revised estimates.

Real disposable income increased 0.3 percent in May, compared with an increase of 0.1 percent in April. Real PCE increased 0.1 percent in May, the same increase as in April.