Trade Balance

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What happened yesterday? The benchmark FNMA 3.5% August coupon lost -13 basis points from Monday's close and traded in a fairly narrow range that was only -34BPS wide from our highs to our lows. The stock market, as measured by the DOW lost -93 points AND MBS are trading lower at -14BPS.  This once again demonstrates that stocks and bonds are more often moving in the same direction. Our Trade Balance was a smaller deficit than expected.  This does show some additional economic improvement and normally would have pressured MBS more but did not materially impact MBS pricing. The Economic Optimism Index was 45.1 vs est of 47.9, this is another report that doesn't usually impact pricing. We had a 3 year U.S. Treasury note auction.  Results: $32 Billion at 0.651% with a bid-to-cover ratio of 3.21.  That measurement of demand was lower than our last 10 year auction at 3.44. Talking "Feds": The President of the Chicago Fed, told reporters he expects growth in the second half of the year to accelerate to a 2.5% annual growth rate, from a paltry 1% rate over the past three quarters, and reach over 3% growth rate in 2014. Based on this forecast, the central bank is “quite likely” to slow down its $85 billion a-month asset purchase plan “starting later this year,” Evans said. The Chicago Fed president said he could not predict exactly at which meeting the central bank would start to taper. “I couldn’t tell you exactly which month that will be,” Evans said. “We need stronger evidence of accelerating growth, a little more momentum,” he added. “We’re not far from that.” As we have discussed several times, the market fully expects some sort of taper by the end of the year.  The only question is: Will it be September or December? From a technical perspective, MBS have now traded below our proprietary ceiling of resistance for the tenth consecutive trading session.