MBS Pricing Snapshot

A mini surge in the "risk on" trade is underway, led by the Euro after Spain approved an expected liquidity mechanism and confirmed that the its regions would continue to guarantee loans received by the mechanism. The Euro shot abruptly higher, having moved from below yesterday's lows to above yesterday's highs in less than an hour.

This helped coax 10yr yields over an important short term technical ceiling at 1.50. 10's quickly moved higher to the mid 1.51's and MBS hit their lows of the morning at 103-10. There may be some small chance of negative reprice risk for lenders who happened to be out with pricing already this morning, but the overall narrow range on the 2-day chart greatly exaggerates the scope of today's move. We've only seen 6 ticks from highs to lows, not to mention that Fannie 3.0s have a decent history of support back to July 6th at 103-08, and moving progressively higher (103-09 on Monday and Wednesday) to 103-10 today.

The first reading on Consumer Sentiment in July came in at 72.0, slightly lower than June's final reading of 73.2. Economists surveyed by Reuters were expecting 73.4.

The declines were led by the 'expectations' component of the index which fell to 64.8 from 67.8 in June. The '12-month outlook' as well as the inflation components also supported the lower headline.

The only notable improvement versus June's report was seen in the 'current conditions' component which rose to 83.2 from 81.5 in June.

Treasuries trended generally higher in the overnight session, but by such small amounts that the longer term downtrend in yields remained unbroken. That trend began essentially with the month of July and has been leading yields lower and in a narrower range ever since. Either today or early next week, the downward-sloping triangle runs out of room, either suggesting a bearish break higher out of the trend or an upcoming test of all-time lows for 10yr yields.

After the start of domestic trading, Treasuries and MBS have both been relatively sideways after a bit of weakness at the open. Volumes have been low and correlation to news, events, and related markets has been light. To some extent, Treasuries have discounted the cash open for equities markets, as they often do, but now with S&P's up a quick 6-8 points at the open, Treasuries aren't giving much chase.

That seems to be in line with the generally sleepy feeling exuded by markets in the overnight session and into this morning. For now, the high 1.49's look like a supportive ceiling for 10yr yields and MBS have been generally holding on to a 103-13 level in Fannie 3.0's. If 10's break above 1.50, we could also see support break down for MBS

Apart from the ongoing surge in stocks, the next piece of data helping to inform that decision is Consumer Sentiment at 9:55am, which is also the last piece of economic data of the morning and week.

* June PPI +0.1 vs -0.5 consensus and -1.0 last time.
* Core +0.2 as expected. Year-over-year unch'd at +2.6

The Producer Price Index for finished goods increased 0.1 percent in June, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Prices for finished goods moved down 1.0 percent in May and declined 0.2 percent in April. At the earlier stages of processing, prices received by manufacturers of intermediate goods decreased 0.5 percent in June, and the crude goods index fell 3.6 percent. On an unadjusted basis, prices for finished goods advanced 0.7 percent for the 12 months ended in June, the same rate as in May.