MBS Pricing Snapshot

The 11:02am results of almost daily scheduled Fed "Twist" buybacks always has the potential to cause a bit of volatility or a more pronounced move in one direction or another. As bond markets have generally weakened during this buyback (10:15 - 11:00am), any further weakness takes us into territory where negative reprice risks would be increasing.

Even now, we're a bit cautious as Fannie 3.0s have put in several ticks around the 104-05 level vs 104-08 to 104-09 during rate sheet generation time. We'd stay vigilant here for any further weakness, especially right after 11:00am.

Builder confidence in the market for newly built, single-family homes rose for a fifth consecutive month in September to a level of 40 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. This latest three-point gain brings the index to its highest reading since June of 2006.

“This fifth consecutive month of improvement in builder confidence provides further assurance that the housing market is moving in a positive direction, but there’s still a long way to go on the road to recovery and several obstacles are slowing our progress,” said NAHB Chairman Barry Rutenberg, a home builder from Gainesville, Fla. “In particular, unnecessarily tight credit conditions are preventing many builders from putting crews back to work – which would create needed jobs -- and discouraging consumers from pursuing a new-home purchase.”

“Builders across the country are expressing a more positive outlook on current sales conditions, future sales prospects and the amount of consumer traffic they are seeing through model homes than they have in more than five years,” noted NAHB Chief Economist David Crowe. “However, against the improving demand for new homes, concerns are now rising about the lack of building lots in certain markets and the rising cost of building materials. Given the fragile nature of the housing and economic recovery, these are significant red flags.”

As expected, the week's economic data continues to have a limited effect on trading levels as this morning's narrower-than-expected trade deficit and surging foreign investments in US Treasuries (in the ancient month of July) barely made a peep.

Ostensibly more correlated with a bit of strength overnight is the biggest piece of German data overnight, the ZEW Sentiment survey. The headline actually declined less than expected, which would normally be negative for bond markets, but the recent high point of the data set--"Current Conditions"-- moved in a bond-market-friendly direction falling from 18.2 to 12.6.

All that notwithstanding, bond markets were already in the throws of a slightly positive overnight session before that data and continue doing fairly well in its wake. Participation and volume have increased as expected today and combined with the bond market gains, helps to solidify some level of "supportive ceiling" in the mid 1.8's (10yr yields).

As we've noted, we can't assume a normal level of connection between MBS and Treasuries at the moment, but the biggest discrepancies were seen last week after the QE3 announcement. We're still sensitive to trading levels in 10's as they can better provide clues as to broader shifts in fixed income sentiment.

With that in mind, it's "so far so good" today with 10's trading in the 1.79's for most of the domestic session. Fannie 3.0 MBS are up 10 ticks at 104-08 and stock futures are almost perfectly flat with yesterday's 4pm levels.

- Current Account Deficit $117.41 bln vs 124.5 bln consensus
- Deficit equates to 3 pct of GDp vs 3.5 pct in Q1

The U.S. current-account deficit—the combined balances on trade in goods and services, income, and net unilateral current transfers—decreased to $117.4 billion (preliminary) in the second quarter from $133.6 billion (revised) in the first quarter. The decrease in the current-account deficit was accounted for by a decrease in the deficit on goods and an increase in the surplus on income.