MBS Pricing Snapshot

(not a full-blow 'reprice alert' at the moment, but a loud heads up to stay cautious as Bernanke Q&A continues).

Regardless of how much of this morning's rally we chalk up to Housing Starts data vs Bernanke's prepared remarks, the fact remains that 10yr yields hit one of the most significant yield levels on the map at 2.46%. This is the 'brick ceiling' that yields hit after the FOMC Announcement in late June and has been a 'brick floor' ever since it was broken on June 21st. If you could only choose one important inflection point in the long, medium, and short-term, this would be it.

It doesn't look like a coincidence that the morning's rally stalled out at 2.46--CLEARLY bouncing MULTIPLE times before ebbing higher to 2.49-ish. Fannie 4.0s had been as highs as 104-07 and are now down to 104-02. The problem there is that the highs were seen just as many lenders were taking down markets for initial rate sheets.

That means that we're ALREADY teetering on the edge of negative reprice risk for the most reactive lenders. Although it's fair to hope and expect that many of them will not have left themselves open to these risks enough for 5 small ticks to matter, 5 ticks has mattered in the past. At the very least, we'd advocate caution from here. It only takes a few words from Bernanke to send this in either direction.

Relevant highlights from Bernanke's Prepared remarks. (FIRST paragraph entirely devoted to housing!):

"Housing has contributed significantly to recent gains in economic activity. Home sales, house prices, and residential construction have moved up over the past year, supported by low mortgage rates and improved confidence in both the housing market and the economy. Rising housing construction and home sales are adding to job growth, and substantial increases in home prices are bolstering household finances and consumer spending while reducing the number of homeowners with underwater mortgages. Housing activity and prices seem likely to continue to recover, notwithstanding the recent increases in mortgage rates, but it will be important to monitor developments in this sector carefully. "

"I emphasize that, because our asset purchases depend on economic and financial developments, they are by no means on a preset course. On the one hand, if economic conditions were to improve faster than expected, and inflation appeared to be rising decisively back toward our objective, the pace of asset purchases could be reduced somewhat more quickly. "

"We are using asset purchases and the resulting expansion of the Federal Reserve's balance sheet primarily to increase the near-term momentum of the economy, with the specific goal of achieving a substantial improvement in the outlook for the labor market."

"If the incoming data were to be broadly consistent with these projections, we anticipated that it would be appropriate to begin to moderate the monthly pace of purchases later this year. And if the subsequent data continued to confirm this pattern of ongoing economic improvement and normalizing inflation, we expected to continue to reduce the pace of purchases in measured steps through the first half of next year, ending them around midyear. At that point, if the economy had evolved along the lines we anticipated, the recovery would have gained further momentum, unemployment would be in the vicinity of 7 percent, and inflation would be moving toward our 2 percent objective. "

" Nonfarm payroll employment has increased by an average of about 200,000 jobs per month so far this year. Despite these gains, the jobs situation is far from satisfactory, as the unemployment rate remains well above its longer-run normal level, and rates of underemployment and long-term unemployment are still much too high. "

"For example, if a substantial part of the reductions in measured unemployment were judged to reflect cyclical declines in labor force participation rather than gains in employment, the Committee would be unlikely to view a decline in unemployment to 6-1/2 percent as a sufficient reason to raise its target for the federal funds rate. Likewise, the Committee would be unlikely to raise the funds rate if inflation remained persistently below our longer-run objective. "

The weaker-than-expected Housing Starts data may be playing some small role here as well, but Bernanke's prepared remarks for his chat with the House Financial Services committee later today are fueling a moderate morning rally. On charts, the rally looks substantial. Indeed it may turn out to be, and it's certainly a bigger break in one direction than we've had since Monday, but it's very much in line with medium term volatility (albeit on a positive note).

10yr yields are down to 2.489 and Fannie 4.0s are now up 8 ticks at 103-31. More to follow on Bernanke's market moving comments.

- Starts at 836k vs 959k consensus, 928k Previously
- Permits 911k vs 1.0mln consensus, 985k previously
- Starts lowest since August 2012

The U.S. Census Bureau and the Department of Housing and Urban Development jointly announced the following new residential construction statistics for June 2013:

Privately-owned housing units authorized by building permits in June were at a seasonally adjusted annual rate of 911,000. This is 7.5 percent (±1.0%) below the revised May rate of 985,000, but is 16.1 percent (±1.7%) above the June 2012 estimate of 785,000. Single-family authorizations in June were at a rate of 624,000; this is 0.6 percent (±1.2%)* above the revised May figure of 620,000. Authorizations of units in buildings with five units or more were at a rate of 261,000 in June.

Privately-owned housing starts in June were at a seasonally adjusted annual rate of 836,000. This is 9.9 percent (±11.4%)* below the revised May estimate of 928,000, but is 10.4 percent (±14.9%)* above the June 2012 rate of 757,000. Single-family housing starts in June were at a rate of 591,000; this is 0.8 percent (±11.0%)* below the revised May figure of 596,000. The June rate for units in buildings with five units or more was 236,000.

Privately-owned housing completions in June were at a seasonally adjusted annual rate of 755,000. This is 6.3 percent (±14.1%)* above the revised May estimate of 710,000 and is 20.2 percent (±12.3%) above the June 2012 rate of 628,000. Single-family housing completions in June were at a rate of 554,000; this is 1.1 percent

Once again, domestic markets come into the day after a relatively uneventful overnight session. Treasuries rallied slightly just before European trading picked up, but a unanimous decision by the Bank of England to hold off on further QE put pressure on core European debt. Treasuries followed with yields rising to 2.56 by 7:40am.

10's are back down to 2.5488 currently (1.7bps higher vs 5pm yesterday) and Fannie 4.0s are 4 ticks lower at 103-20. Housing Starts data is coming up in 3 minutes as well as the print release of the statement Bernanke will deliver later this morning.