A bit of a "gut punch" is emerging for MBS.

Don't worry about dollar price, or locking now, we're still at 100-03+

But of concern is the SPREAD action since the bill was passed.

Here's the 2 day interplay between MBS (teal) prices and UST (yellow) prices

That graph doesn't really tell as much of a story as the following which is the actual Price spread between the two, plotted as one line. The higher, the more spread. (duh?)

Spikey spikey, eh?

Put yourself in investor's shoes for a moment and think about why you'd be buying treasuries right now over MBS (which is exactly what the uptick in spread indicates).

The market is basically in the process of telling us, that this bill's passage is not yet perceived as positive by the markets.

Granted we've held steady and gained a bit, but owing to the length, idiocy, and "back and forth" of the debate leading up to this decision, investors are likely left wondering what the long term implications are about congressional willingness to act, let alone simply understand what's at stake. It's been clear to those of us who follow MBS that the failure to secure immediate passage not only hurt us that day, but also cast doubt on the potential future passage of the bill as non-commital. In other words, even though the bill has passed now, the markets are giving more weight to the fact that it was so hard to pass in the first place.

The markets know something that congress is only beginning to know. JUST ONE effort with the miniscule amount of 700bln (couch cushion money!) will be a brief "pick-me-up" for markets, but in order to maintain any level of ongoing optimism about capital market liquidity, investors would like to have seen a more concrete show of support for liquidity measures. Basically, congress has shown the markets its hand. And the markets don't like it.

Even at a extreme typing speeds, more has developed since the inception of this post: simply, spreads have widened further still. The assertions and/or opinions and/or suggestions contained herein are further edified by that occurrence. (what a fancy way to toot one's own horn!)

To revisit a past horn-tooting, this coincides exactly with the prediction that, because of the underwhelming initial response by congress, and because the GSE bailout was fraught with more sharply pointed specificity (thus a huge tightening), that this current legislation, by contrast, could, at best, have a slow and steady positive impact on MBS. EVEN THAT we have not yet seen!!!! A slow and steady improvement would necessarily include AT THE VERY LEAST a spread level that holds steady.

The fact that we are seeing spread widening indicates that we are helplessly dependent on equities market weakness, thus riding the coat-tails of the "favorite sibling" treasuries. Gosh Darnit people! We are almost back to the horrible spread levels of last night!

The markets must stay weak in order for us not to lose ground on price in the next session or two. That is a distinct possibility, and hopefully we will see spreads gradually tighten as more details of the 450 page novel of a bailout are digested and held to the flame.

Until then, the simple fact that the bill is passed does not give us license to tune out. We are just as susceptible to a rapid tank.

Epic Analogy Time! (i know you were waiting for it)

Everyone stay still...

We've alluded death from the first attack. Taking cover now in the shelter of this crude cave, the dragon stalks the scorched earth just outside, eyes scanning, nostrils flaring, ears to the wind, ever seeking the slightest indication that his victims may yet be within reach.

Ah.... refreshing.

So, we're the MBS market, the dragon is a lack of buy demand. Us not moving means we have to "wait and see" regarding market sentiment. The stalking dragon means that the bid for MBS will evaporate rapidly if more nauseating market buzz either surfaces or if existing buzz is addressed in an unsettling way. Wonder what's worse? Getting eaten by a dragon or losing more ground in an already weak MBS market...

Whatever the case, be ready to act if necessary, but don't move a muscle...