MBS Pricing Snapshot

Everywhere you look, trading levels are hitting their weakest (or strongest) levels of the day. 10yr yields, Stock Markets, The Euro... All at their highest levels. For domestic markets, yields and stocks are at their highest since MID-OCTOBER! For the Euro, it's even more extreme as you'd have to go back to early May to get a higher value.

MBS, of course, are buoyed in the historical context by QE3 and aren't in as rough a shape as the other corners of the market, but the implication for the moment is no less disconcerting. 104-13 had been a strongly held pivot point until this morning, and we've just blown through it.

In the bigger picture, as we noted yesterday, 10yr yields have run to at least 1.835 three out of the past three times they've closed over 1.75% as they did yesterday.

Bottom line, we're off 5 ticks on the day now, and that's potentially 5 ticks from a lender's initial rate sheet, already raising concerns about potential negative reprice risk depending on the time of morning that a particular lender released their first sheet. Habits vary as to how quickly into a losing session certain lenders are willing to reprice, but risks are certainly elevated already for any lender who was out with rates before 10:30am.

Builder confidence in the market for newly built, single-family homes rose for an eighth consecutive month in December to a level of 47 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. This marked a two-point gain from a slightly revised November reading, and the highest level the index has attained since April of 2006.

“Builders across the country are reporting some of the best sales conditions they’ve seen in more than five years, with more serious buyers coming forward and a shrinking number of vacant and foreclosed properties on the market,” observed NAHB Chairman Barry Rutenberg, a home builder from Gainesville, Fla. “However, one thing that is still holding back potential home sales is the difficulty that many families are encountering in getting qualified for a mortgage due to today’s overly stringent lending standards.”

Any report on trading levels this morning must be clearly qualified as a mere frozen moment in time. Reason being, it's been a choppy morning for MBS, with several breaks back and forth across 'unchanged' levels.' As of this very moment, Fannie 3.0s are perfectly unchanged at 104-14, which is a long term pivot point of relatively high importance, having been the pre-QE3 price high for MBS back in late July (not to mention the rarely tested post QE3 low and area of firm support yesterday and Thursday).

As for the broader bond-market picture, things have been mostly weaker and exceedingly volatile with respect to the narrower ranges that prevailed through most of November and early December. Yesterday's sell-off marked a shift toward a more defensive stance for bond markets, in large part due to a shift in the tone on Fiscal Cliff news.

This shifty tone continued late yesterday and again this morning as the two sides continue taking baby steps toward the center of the ping-pong table, continually volleying incrementally more conciliatory shots toward each other. Before yesterday, the shots seemed designed to crush the opponent, whereas they now look like "gimme's" designed to allow for an easier return volley.

Risk markets liked that a lot yesterday, especially after the close, when Obama responded with his own plan after Boehner's weekend floater. Naturally, these floated proposals aren't intended to garner stamps of approval, but rather to serve as the aforementioned gentle ping-pong shots that help both players come closer to the center. Markets see the teamwork. Stocks like. Bonds don't.

10yr yields hit 1.794 overnight, but got a bit of relief in the European session, falling to 1.761. Yields rose again as domestic accounts filed in, but didn't make it past overnight highs by 8am. Minutes later, stock futures and bond yields bounced near their overnight ceilings and headed lower. Stock led the way with S&P futures down nearly 10 points since then. Treasuries are much more hesitant, only ebbing to 1.777 currently

Morning economic data? What's that? All the flows are centered on one of two things: either on Cliff headlines themselves, or the other bigger tradeflows. We've had both the Trade Deficit and NAHB Housing Market Index this morning with no reaction on either front.

Stay tuned for Cliff, though this afternoon's 5yr Auction may be worth tuning in for as well. For now, keeping a hopeful eye on 10yr support at 1.79 and MBS within 2 ticks of 104-13.

- Trade Deficit $107.51 bln vs 103.4 bln consensus
- Smallest Since Q4 2010
- 2.7 pct of GDP, smallest since Q2 09
- Despite some morning volatility, markets not trading this data much. (Narrower trade gap would tend to suggest the opposite movements from what we've seen anyway).

The U.S. current-account deficit—the combined balances on trade in goods and services, income, and net unilateral current transfers—decreased to $107.5 billion (preliminary) in the third quarter from $118.1 billion (revised) in the second quarter. The decrease in the current- account deficit was more than accounted for by a decrease in the deficit on goods. Changes in the other balances were relatively small.