Good Morning.

Benchmark Treasuries watched with an open mind yesterday as stock traders cautiously questioned the sustainability of coordinated rescue measures abroad. After poking and prodding at the previous session's low prints, the S&P quickly picked up positive momentum and broke through the 1150 psychological pivot before reversing course just below the S&P's 50 day moving average (1172) and closing modestly lower on the day at 1155.

Wavering confidence in riskier assets and a general unwillingness to "jump the gun" on a stock side recovery rally resulted in a choppy trade for "rate sheet influential" Treasuries. Although the 10 year TSY bounced around an 11 bp range (mirroring the movements of S&Ps),  10s ended up closing 1bp lower on the day. Total Treasury futures trading volume was above average with the majority of volume concentrated into the early session downtrade, however modest volume was seen accumulating at the low prices of the day---which I initially thought was short covering but open interest rose so there were new long positions added.  The 2s/10s curve was 1 basis point steeper at 269bps as traders looked to bake in whatever supply concession they could before the 10yr note auction today.

Class A MBS coupons started the settlement process yesterday. The May FN 4.5 coupon is off screens and we are now watching the June FN 4.5 coupon, which ended the day -0-04 at 101-05 yielding 4.384%. On a relative basis (yield spreads), mortgages performed well against benchmarks as lower dollar prices helped ease the pressures of negatively convex bond math. After approaching the +90bps/10yr level in the heat of the flight to quality rally last week,  the current coupon has returned to more stable ground in the +70-80bp/10yr TSY range.  

In terms of mortgage rates, there were scattered reports of reprices yesterday but nothing broad based. On a best efforts level I still see Chase as being the most aggressively priced C30 lender, just last week they were offering better best efforts pricing than mandatory one-offs. That tells you lenders are seeking out locks while rates are near their lowest levels...don't expect to see unjuiced rate sheets last forever. This might be one of those instances where detaching yourself from trading flows turns out to benefit your bottom line.

Plain and Simple: While you might be able to pick up a few extra bps here and there if stocks fail to recover (tempting), our big picture primary mortgage market perspective reminds us that mortgage rates are near their lowest levels of the year...at  rates lenders have proven unwilling to push below.  If you are floating through this...stay defensive because benchmarks are storing energy for a directional shift in momentum.

Benchmark yields ticked higher overnight as global equities inched up. All major markets except Tokyo traded in the green. Here in the U.S., S&Ps are +5.25  at 1157.50 and the 3.625% coupon bearing 10 year TSY note is currently bid -0-04 at 100-20 yielding 3.546%. The yield high seen yesterday is however holding and 10s are still within the recent range as rates traders await more guidance from the stock lever.

"Rate sheet influential" mortgages are holding steady near yesterday's "going out" marks. The JUNE FN 4.5 MBS coupon is currently -0-00+ at 101-04 yielding 4.373%. The secondary market current coupon is less than 1 bps higher at 4.353%. The CC yield is +79.7 bps/10yrTSYs and +76.8bps/10yrIRS. Yield spreads are slightly tighter this morning. If you are looking at the chart below wondering why there was such a large price drop yesterday afternoon, PLEASE READ THIS POST explaining how the TBA trading mechanism and the time value of money affect front and back month MBS valuations. You will also gain a better understanding of why 60 day locks are more expensive than 30 day.

REPRICES FOR THE BETTER AROUND 101-11

REPRICES FOR THE WORSE AROUND 100-28

The main event of the day for interest rate traders will be the 1pm $24 billion 10 year TSY note auction. The ever-evolving crisis abroad has resulted in a massive flight to safety over the past week...with the U.S. now at the forefront of the global economic recovery, investors are parking currency reserves in dollar denominated assets with the intention of preserving principal. On the surface, this should bode well for auction demand today. However with the stock lever playing such a pivotal role in the directionality of interest rates we must ask: what yield will investors deem fair to attract their demand?  If you think stocks are headed higher in the week's to come...then GUTFLOPING your pipeline is  your best move. If you are bearish and expect stocks to bounce around these levels for a few weeks while the EU crisis plays out...then floating into a shorter lock period is your best move. Be attentive and stay defensive. Chopatility is likely as we await guidance from related markets.