MBS Pricing Snapshot

* 4.47 mln vs 4.52 mln consensus
* 2.3 pct higher than June's 4.37 mln
* Unsold homes up to 2.4 mln from 2.37 mln
* Months' supply down to 6.4 vs 6.5 previously
* 24 pct distressed sales vs 25 pct in June.

Sales of existing homes rose in July even with constraints of affordable inventory, and the national median price is showing five consecutive months of year-over-year increases, according to the National Association of Realtors. Monthly sales rose in every region but the West, where inventory is very tight.

Total existing-home sales1, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, grew 2.3 percent to a seasonally adjusted annual rate of 4.47 million in July from 4.37 million in June, and are 10.4 percent above the 4.05 million-unit pace in July 2011.

Lawrence Yun, NAR chief economist, said housing affordability conditions are very good. “Mortgage interest rates have been at record lows this year while rents have been rising at faster rates. Combined, these factors are helping to unleash a pent-up demand,” he said. “However, the market is constrained by unnecessarily tight lending standards and shrinking inventory supplies, so housing could easily be much stronger without these abnormal frictions.”

NAR is asking the government to expeditiously release the foreclosed properties it owns in inventory-constrained markets.

Given population and demographic demand, Yun said existing-home sales could be in a normal range of 5 to 5.5 million if all conditions were optimal. “Sales may reach 5 million next year, but it will require more sensible lending standards and stronger job creation to push beyond that,” he said.

If Treasury trading were to close right now, 10yr Treasuries would mark their best rally since August 2nd. It says a lot about how beat up we've recently been that we're still just under 5bps improved on the day. But we're NOT complaining!

The overnight session kicked off with a huge (enormous really) volume spike in 10yr futures which noticeably broke a resistance level that had been firmly intact since 8/16. We'd note an extremely weak trade report out of Japan, but JGBs (Japanese Government Bonds) were less responsive to the data than Treasuries, not to mention the timing of the volume spike was a bit late to be an event-based trade.

So the spike remains somewhat enigmatic--at least to us--but what is clear is that it was the largest single minute of 10yr futures volume of the entire session, which is not-at-all common for overnight trading hours. It's also clear that this kicked off a good measure of overnight positivity for bond markets, with the trading levels from before the spike making an encore performance to act as a supportive ceiling.

Said ceiling is roughly 1.792 in yields and in terms of futures, 132-22. European trading chopped around in a narrow range between there and 1.77 into the domestic open. Since then we've moved down to 1.753 and MBS moved up from a 102-16 open to 102-20 in Fannie 3.0s currently.

European headlines have been light overnight and non-existent so far this morning. Existing Home Sales print at 10am and the FOMC Minutes from the August 1st meeting are out at 2pm Eastern today. Volumes overall are picking up, as expected.

From a technical standpoint, our favorite possibilities of the day would be to see Fannie 3.0s and 10yr yields (or futures really) hold on the other side of these recently crossed pivot points. 102-14 to 102-15 is essentially upper resistance for Fannie 3.0s since mid-day August 15th and has been supportive in the first hour today. Similar story with 1.78+ in 10yr yields. We're in "wait and react" mode with respect to these pivots for now and are cognizant of that there are two more bigger, more aggressive resistance levels to get through if we rally.