MBS Pricing Snapshot

- ISM Services PMI up to 55.4 vs 54.0 forecast
- 1 pt higher than last reading DESPITE THE SHUTDOWN
- Employment component 56.2 vs 52.7 previously
- All of the above continues to build the case that the shutdown had far less impact than expected and that this Friday's NFP has every chance of beating consensus in the same way. As such, we're selling off even more now.

In September, the NMI™ registered 54.4 percent, indicating continued growth in the non-manufacturing sector for the 45th consecutive month. A reading above 50 percent indicates the non-manufacturing sector economy is generally expanding; below 50 percent indicates the non-manufacturing sector is generally contracting.

SM's Non-Manufacturing Business Activity Index in September registered 55.1 percent, 7.1 percentage points lower than the 62.2 percent registered in August. Twelve industries reported increased business activity, and five industries reported decreased activity for the month of September. Comments from respondents include: "The turmoil and uncertainty of the current state of politics and the U.S. involvement overseas continues to drag on the economy" and "Seasonal growth/improved economic environment."

This will be necessarily brief as the ISM data is imminent, but just another quick heads up that prices are tanking. This is all momentum. Stocks and bonds are getting hit hard and in unison--usually a sign that investors are guarding against a strong piece of economic data that could adjust the QE outlook (because less QE would hurt both stocks and bonds).

Fannie 3.5s are now down 10 ticks to the very serious level of 101-31 (because it's the first time we've seen that since the last NFP). 10yr yields are up nearly 5bps on the day at 2.65. ISM coming up in 1 minute and will either accelerate or reverse this morning's trends.

Treasuries did a good enough job of holding their ground during Asian trading hours, but began weakening during the European session. European bond markets were on the ropes right from the start, though a much stronger-than-expected Services PMI in the UK put extra pressure on British and German debt (which US Treasuries tend to follow overnight).

The US gets its own services PMI at 10am with ISM Non-Manufacturing and concerns over a repeat performance of--well, every other PMI this past week--could be fueling some of the extra selling pressure we're seeing this morning.

As far as that pressure is concerned, 10yr yields are up to their highest levels since mid October and Fannie 3.5s are down 5 ticks to 102-04 (part of a supportive zone from 102-00 to 102-04). The ISM data is at 10am, with a forecast of 54.0 vs 54.4 previously.