Lots of headlines to digest lately.

What region is the market focused on again? North Africa, The Middle East, Spain, Portugal, Greece, China, Japan, the U.S.?

What trade is the market working right now? Long Oil? Short Stocks? Long Gold? Short Bonds? Short the Dollar?

Wait. What about economic fundamentals? Expansion? Contraction? Inflation? Deflation? Reflation? Rate Hike? QEIII?

Certainly enough to make you wonder what's priced into asset valuations and what isn't priced into asset valuations.

Only time will tell how it all plays out, for now all we can do is take the poop we've been given and make "poop-juice". (POOP = UNCERTAINTY)

A few charts and some perspective.....

The FNCL 4.5 MBS coupon is looking to trade back into the 7-week range we unceremoniously occupied from late-December to late-January.  Read on...

In benchmark TSYs we've noticed a real push back lately every time 10s cross through 3.40% resistance. These are real money hedgers fighting a potential move "down in coupon"....fighting a shift in duration bias that would force them to adjust their asset/liability cash flow management strategies.  That can be a costly endeavor  if the market is not totally committed to an interest rate rally...which it clearly isn't right now. A hesitancy to rally makes perfect sense in that regard...

It'll take a steady drip of bond market friendly news and events to break the even bigger resistance level that lies at 3.30%.

10s have traded below 3.40% and FNCL 4.5s have been bid over 102-00 in the past two-months, but "Best Execution"  never improved past 4.875% (4.75% was reported but not widespread).   And it's not gonna happen unless lenders start hedging their pipelines with 4.0 MBS coupons again.  You might have read this on MND once or twice or ten times lately...

"Lenders have moved the Best Execution 30-year fixed note rate as low as they possibly can without drastically altering their pipeline hedging strategies.  This is a factor of what production mortgage-backed security coupon is most liquid in the secondary mortgage market. On conventional loans, the 4.50 percent MBS coupon is the hedging vehicle of choice for lock desks.  Home loans with note rates between 4.875 and 5.25% are generally used to fill 4.50 percent MBS coupon trades. Until MBS investors demonstrate sustainable demand for 4.00 percent 30-year fixed MBS coupons, lenders will not find it economically efficient to quote 4.75 percent note rates without expensive permanent buydown costs. From that perspective, if you are floating a conventional home loan interest rate, you should not be expecting further improvements to your actual rate in the short term. If the bond market recovery rally continues, closing costs will improve, but on the whole, it will take a sustained move higher in 4.00 percent MBS coupon prices for Best Execution to dip below 4.875 percent."

THIS LEAVES US STUCK ON ANOTHER LEDGE.....

The chart below is one way to illustrate our point. It graphs the price difference between the FNCL 4.5 MBS coupon and the FNCL 4.0 MBS coupon.  Right now the price spread between the two coupons is 3.45 points or 345bps.  The last time we saw lenders hedging with 4.0 MBS coupons,  the spread was closer to 280bps.  4.0s have a lot of catching up to do! A flatter yield curve would certainly help our cause...

The FN 4.5/4 swap trades in ticks but we're gonna present it to you in bps to keep it simple.

Now for an update on our long-term 10yr TSY note chart. We think the bond market is repeating history.  If that theory turns out to be the case, our target in 10s in 2.85%.  4.00% MBS coupons would surely be trading at that point. If not, this is as good as it gets!

GUIDANCE FROM OUR MORTGAGE RATES COMMENTARY: The failure of the bond market to extend its recent rally really serves to drive home a point we've been harping on for several weeks now: WE'RE STUCK.  If you're floating, you're doing so for marginal improvements in UPFRONT COSTS ....not RATE. When it comes to the outlook for lower rates in the months ahead, we're still optimistic about that expectation but realize it will require a steady drip of bond friendly (economy-unfriendly) news and events .  In the short-term, or at least until "the levy breaks" and all hell breaks loose around the planet, we don't expect lender rate quotes to look much better than they do right now.