After ISM data printed slightly weaker than expected results, MBS are off their lows and back at their preferred pit-stop of late at 101-20. 10yr notes touched 3.46 before returning to 3.433 currently. 3.43 is sort of the demarcation between yesterday afternoon's high yields and, well, this morning's current levels. We're sort of seeing a few blips of resistance there. All in all though, it's not even a certainty that the correction is totally attributable to the data. Technicals and trade-flow considerations dominated the morning and will make more than a few repeat appearances until markets decide exactly what they're going.

*** ISM REPORT ON U.S. NON-MANUFACTURING SECTOR SHOWS PMI AT 57.3 IN MARCH (CONSENSUS 59.5) VS 59.7 FEB *** ISM NON-MANUFACTURING BUSINESS ACTIVITY INDEX 59.7 IN MARCH (CONSENSUS 65.5) VS 66.9 IN FEB *** ISM NON-MANUFACTURING PRICES PAID INDEX 72.1 IN MARCH VS 73.3 IN FEBRUARY *** ISM NON-MANUFACTURING EMPLOYMENT INDEX 53.7 IN MARCH VS 55.6 IN FEBRUARY *** ISM NON-MANUFACTURING NEW ORDERS INDEX 64.1 IN MARCH VS 64.4 IN FEBRUARY

Barclays Capital notes that over the past few months, mortgage REITs have been aggressively raising equity, which should translate into significant demand for MBS. Barclays states that since December 2010, "agency mortgage REITs have raised about $6.6 billion of new capital. Assuming a 6-10x leverage multiplier, this should translate into $40-65 billion of agency MBS demand." A comprehensive analysis of REIT's and their trends is beyond the scope of this commentary, but a few simple notes should be made. Real Estate Investment Trusts are simply a corporation or trust that uses the pooled capital of many investors to purchase and manage property or mortgage loans. They are traded like stocks, are usually very liquid, and have special tax considerations - the most notable being they pay no taxes but instead pass those on to shareholders. Mortgage REIT's are not risk-free, however, since they take leveraged exposure to agency MBS and are typically exposed to duration risk, negative convexity risk, mortgage spread widening risk, yield curve flattening risk, idiosyncratic risk associated with prepayments, and the risk that short-term funding market could freeze up. Most agency MBS-focused mortgage REITs took the last three risks (flatter yield curve, idiosyncratic prepay risk and the risk that repo funding market could dry up) but the exposure to the first three risks is now more notable because interest rates are at historically low levels and REITs seem to be buying fixed-rate agency MBS instead of hybrid ARMs which increases their exposure to negative convexity and mortgage spread risks.

Bonds have more or less fallen off a cliff in the last 10 minutes. 10yr yields have pushed up to 3.445 and FNCL 4.5's are now down 4 ticks on the day at 101-20. If you already had rates this morning, there's a reasonable chance of an early reprice for the worse.

Treasury volumes are roughly 3/4ths of recent averages and at 3.401, yields are slightly lower than the best levels seen yesterday. FNCL 4.5's are 3 ticks better than yesterday's close at 101-27. Comments from Bernanke last night in which he said that current inflation concerns should be temporary are helping bonds in general. He also specifically mentioned that the weak housing market was proving to be a drag on the recovery.

The European debt crisis is back in focus today. Interest rates are mostly unchanged while equity futures are being pressured lower this morning after Portugal's debt was downgraded again and the country was called out for needing a bail-out. Moody's said its single-notch downgrade to Baa1 (with a negative outlook) was "driven primarily by increased political, budgetary and economic uncertainty." It was the agency's second downgrade to Portugal in a month, yet Moody's rating is still two notches higher than Standard & Poor's assessment. Portuguese 10-year bonds were yielding 8.36% on Monday. Markets believe assistance from the EU could be imminent. "Moody's believes the new government will likely approach the [European Financial Stability Facility] as a matter of urgency," the agency wrote. Treasuries weakened again overnight though, in part owing to a speech from Fed chairman Ben Bernanke, who last night called inflationary issues in the U.S. "transitory." The comment was widely interpreted to mean the Fed chief intended to continue the program of quantitative easing despite more hawkish members at the Fed calling for an early exit of the program. The benchmark 10-year yield finished Monday two basis points firmer at 3.425% and is currently +5/32 at 3.409%. The FNCL 4.5 MBS coupon is +2/32 at 101-26. S&P 500 futures are 3.50 points lower at 1,325.75 and Dow futures are 18 points lower at 12,319. Light crude is 0.39 at $108.08 per barrel.The day ahead marks the busiest day of an otherwise barren week. Here's what on the calendar: http://www.mortgagenewsdaily.com/mortgage_rates/blog/206011.aspx