MBS RECAP: Positive Reprices Reported

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2:07PM  : 
Dallas, KC Feds wanted higher discount rate
WASHINGTON, May 24 (Reuters) – Two regional Federal Reserve banks again sought a modest increase in the rate for emergency bank loans but were overruled by those wanting no change, minutes of Fed Reserve board meetings in March and April showed on Tuesday.
Directors of Federal Reserve banks in Kansas City and Dallas sought a 0.25-percent increase in the discount rate, but the other 10 regional Fed banks argued the rate should be left at 0.75 percent. The U.S. central bank’s board sided with the majority.
The Kansas City and Dallas Fed banks have for months sought to raise the discount rate to 1 percent as a step toward moving the spread between it and the benchmark federal funds rate closer to pre-crisis levels.
Indeed, Kansas City Fed President Thomas Hoenig has been the only top Fed official to call for an increase in the fed funds rate itself since the central bank cut official borrowing costs to effectively zero.
The minutes showed lingering worries about a lackluster recovery.
“Federal Reserve Bank directors generally noted that although the economic recovery was progressing, they were cautious about the economic outlook,” the minutes said.
Some directors saw upside risks to inflation, while others believe higher energy and commodity costs — coupled with efforts to slash government spending — posed more of a threat to consumer spending.
“Risks included rising commodity and energy prices, which had the potential to dampen consumer spending, and increased fiscal stringency at all levels of government,” the minutes said. ((For more stories on Fed policy go to FED/AHEAD)) (Reporting by Pedro Nicolaci da Costa; Editing by Neil Stempleman)

11:23AM  : 
Stocks, Fed POMO, Auction Concession, Pressuring TSYs
A raft of data and impending events to consider just hit the TSY market at 11am. This is normally an hour that sees some movement in yields due to the details the Fed’s Permanent Market Operation TSY buying that are normally released at this time. In addition, stocks just put in their most convincing bounce of the day, so the stock lever may be having an effect as well. There was also a headline about the World Bank unveiling a $6 bln funding package for Tunisia and Egypt, though it’s unclear as to to the extent this is impacting yields. On a final note, there’s the 2yr note auction coming up in 2 hours and TSYs have a penchant for building in pre-auction concessions to make for better bid facilitation at auction time. One, some, or all of the above may be pushing yields higher, but the important part of the story is merely that they ARE higher, having moved from 3.14 to 3.16 in the past few minutes. This is effectively in line with the highest yields seen this morning and thus far has only served to drop FNCL 4.5 MBS to 103-12, in line with their lowest prices of the morning. So everything is still within its range today, albeit at the weaker end. We wouldn’t even be surprised to see TSYs try to push even weaker ahead of the auction, but for now, we remain contained. Given that the drop in MBS wasn’t even 3 ticks, this should not be enough for reprices for the worse (although we DO have ONE outlier reported as having repriced for the worse). That eventuality is more likely to materialize after the auction or if prices move outside the current range.

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