Today's beginning of Class A Settlement (30 yr Fannies and Freddies rolling from December to January) we saw one of the most stable, directional trends in the absence of of any relevant scheduled data.  Volume was just slightly below average.  Today's only data was the National Association Of Realtors Pending Home Sales Index for october which fell to 88.9.  This was slightly better than expectations of 86.5.  There's a tacit implication here that the government's stated goal of aiding economic recovery by lowering mortgage rates may indeed by drawing some buyers off the sidelines.

That data though, as mentioned, was of little consequence to old Cool Hand, aka, the MBS curve.  Despite sizeable fluctuations in treasuries, MBS held in a steady groove all day long.  This wasn't always a good thing as treasuries staged a decent afternoon rally following good demand for 4 week T-Bills (bit to cover was over 4).  The shortest and longest ends of the curve were the biggest beneficiaries as the ten year picked up 30 ticks to close at a 2.63 yield by "lights out" and the 30 year up 78 ticks to a yield of 3.04, both in record territory.  The FTQ bid here was evident as the dow shed over 200 points and oil remains in low-$40 handle range. 

Spreads were better in the morning and worse as the tsy rally progressed, but again, spread action was driven largely today by tsy volatility.  MBS, for once, were the level-headed player.  Overall though, spreads improved slightly on the day, but remain in "too wide" range.  What does this mean to us?  As long as treasuries "hang out" in these record low yields, the already stretched wide MBS spreads should keep rates stable at least and possibly even improving.  Two key challenges arise there.  first, even if we are currently in the process of defining a new reality of what normal yields will be during this recession, you can be the markets will not comfortable simply jumping to a 2.6 yield on the 10 year and holding there.  We will like see some retracement.  Additionally, there are still year end balance sheet concerns to contend with, and in the absence of some bullish MBS buying news from Uncle Same, we WILL have to give back some of our newly acquired happiness.  The mitigating factors are also twofold: a) if we give back, it will likely not be too long before the new year brings new hope for MBS and b) the possibility of getting more info regarding government purchasing of MBS is just as likely as unlikely.  So coin flips are the order of the day.

Speaking of getting more news about the government, there is a report due out tomorrow from the panel set up to overee the Tarp legislation.  It's expected to border on derision but who knows what "clues" traders will get as to future potential of MBS purchasing involvement.  It could go either way and it could have significant or nonexistant impact.  Either way, this is something we should dilgently prepare for.  With the trend channel pushing up all the way through the end of the day, floating into tomorrow makes more sense now than it would have this morning. 

Wednesday's economic calendar picks up a bit tomorrow with the early birds getting the MBS application survey at 7AM, after coffee and the paper, there's Wholesale trade at 10AM, and the late sleepers get the Treasury Budget at 2pm.  The latter report mentioned here will carry some greater-than-normal significance as it will include critical information on MBS purchases, so, in an uncommon turn of events, we'll want to be ready for significant movement later in the day as opposed to in the morning.  A final piece of data, more pertinent to tsy's, but with potential impact for us nonetheless is a $20bln 278 day CMB auction (cash management bills) and $28 bln in 3 years.  This will offer clues as to corporate credit demand for short to medium term obligations, but does not normally shake up MBS too much. 

Still, everything is both more and less significant than normal in these strage times.  We've seen crushin scheduled data get completely ignored when it otherwise would not have been in the past.  We've also seen seemingly disconnected data move MBS significantly.  So Sun Tzu provides our Mantra for the time being: He will win who, prepared himself, waits to take the enemy unprepared.  In other words, expect the unexpected and be ready to act.  We have several reasons to be on high alert tomorrow:

1. The data hits all over the map in terms of time, so the volatility may not be heavily concentrated

2. There is both scheduled data and the potentially unexpected ripples caused by government statements

3. We've had a pretty decent run in MBS over the past few days, always a recipe for "something" (usually a retracement).

4. We're nearing mid-December, usually a recipe for "something" (usually a retracement)

5. Treasuries again bid up to record territory (usually a recipe for retracement, though more so for tsy's than for us).

6. We're right in the middle of 48 hour settlement, so trade flow and allocation concerns may come into play.

7. Any day, a Manhattan-Project-Esque explosion for the positive or negative could take place when we find out more about how, how much, and when the Feds will start writing checks for MBS. 

It's this latter-most item that recent history informs us can carry the most surprising amount of impact.  If it weren't for that item, we'd almost certainly be more pre-disposed towards locking.  Indeed, most of the conventional indications favor a lock after we've had such an impressive gain, not the least of which being that it is usually much harder to pack on additional gains after a run up like this than it is to lose an eye-watering amount to the downside.  Furthermore, though we are members of a certain club that we don't talk about, one does have to "know when to fold 'em."  As one of our members called me out for plagiarizing the following quote from primetime TV last night, "pigs get fat, but hogs get slaughtered."  It's at these potential peaks, where we get lulled into a false sense of security by all the price positivity and float when we should just take our gains and move on to the next deal, EVEN IF the ensuing days will see continued gains.  Granted, we'll always guide you into the very center of those tempests and our past battles to those ends have been fruitful, but the MBS Gods are fickle at best, and they have tricks that even we cannot predict.  So the word to the wise is to heavily consider what a bad float decision might do to you compared to a bad lock decision.  At least with a skillfull lock, you'll either have a reasonable chance to renegotiate or float down if things improve drastically, whereas with an overzealous float, the deal could be jeopardized altogether.  The smaller your pipeline, the more heavily this should be considered.

Then there's the x-factor, the dark horse, the 11th inning miracle potential that despite all odds MBS could get rocked to the positive when more government purchasing details are announced.  If tsy's can indeed stay low, THERE IS in fact, plenty of room for rates to improve even further if we get those blessings from the MBS gods. 

Whatever you do, we urge you to treat your pipeline as an investment fund.  If you have more than a few deals, perhaps consider "hedging" by locking a few of the most sensitive ones and floating a few of the most flexible ones.  Our adventures together are not about wildly profitable kill stories, but rather about the long-haul improvements in quality and income.  With ALL THAT in mind, floating into tomorrow looks like it will not utterly crush us.  And if it does, we should have a reasonable rate sheet in the morning to get us out of the game with acceptable losses.  So you're welcome to keep a few toes in the boat as long as you have digested all the preceding.

With that, I'll leave you with what may be one of the most beautiful trend channels we've seen in quite some time.  The fact that we drew this early this morning and that it held true all day makes it even more gratifying.  Until tomorrow!