11:20 MARKS

FN30_______________________             GN30__________________________

FN 4.0 -------->>>> +0-07 to  99-16          

FN 4.5 -------->>>> +0-07 to  100-28          GN 4.5 -------->>>> +0-08 to  101-01

FN 5.0 -------->>>> +0-05 to  101-26          GN 5.0 -------->>>> +0-07 to  102-03

FN 5.5 -------->>>> +0-05 to  102-15          GN 5.5 -------->>>> +0-04 to  102-19

FN 6.0 -------->>>> +0-03 to  103-05          GN 6.0 -------->>>> +0-00 to  102-31

Good Morning Happy Ground Hog Day. Phil saw his shadow

Last week the interest rate world was subjected to record TSY supply issuance and a general disdain for the ghost of "supply yet to come". The yield curve steepened and although our MBS put up a fight...the stack succumb to a steepening yield curve environment. Your rate sheets were worse on the week and loan officers were left with a disparaging feeling regarding the path mortgage rates appear to be following

The outlook for bonds looks a little gloomy considering the economic crisis has seemingly worsened and our political leaders are confronting the issue with more and more government interventions and socialist spending.  The MBS stack has reacted to this general steepening in a few ways of its own. The initial onslaught of Fed buying supported the MBS market  during the "lame duck" period before Obama's stimulus package really grew wings and took flight, now with more and more debt expected to be issued the fixed income investor has more reason to be short the yield curve. From a  single minded perspective (static valuation) this puts MBS at a fundamental disadvantage.

On the other hand the Fed is spending....and not just all willy nilly either....they are buying $3-4bn MBS per day.  Yes I know they bought up in coupon last week but that is expected as lenders delay the "it that shall not be  named". This disconnect between primary/secondary spreads has put us in quite the predicament. As the stack sells and fuller coupons cheapen (premium prices fall  from 103 to 102)primary rates will be pushed back into the 5's. This retracement/correction has decreased the risks associated with portfolio prepayments and given rise to new  opportunities  for  yield hungry bidders to explore fuller coupons (5.5, 6.0s, 6.5s).

BUT...here is where the counterbalancing occurs....as buyers move up in coupon negative convexity will take over in the low end of the stack and 4.0s- 4.5s -5.0s will cheapen at a faster and faster pace....well cheaper means bargain  buying opportunity for thinner coupons. Which means there will be periods of down in coupon rallies and reprices for  the better.  The more the short end of the stack sells the faster we expect the down in coupon pace to be...when it happens.

On that note...

We have multiple reports of lenders preparing themselves for the operational chaos of a "it that shall not be named"....we know mortgage bankers are adding staff and training old dogs to do new tricks....we just don't know how long the process will place a pause on the "it that shall not be named". Once the administrative details are managed, lender's willingness to reign in the excess margin they have currently baked into rate sheets becomes the next obstacle.

Rates should be better this AM.

By the way last week I talked about HR 200 and its threat on TBA MBS. In early/mid 2008 the MBA said the passing of this bill would push mortgage rates up 1-2%. At this point in the process we dont see HR 200 causing much of a ripple in the mortage rates of the near future. We will continue to re-evaluate while the yield curve gyrates through its cycles...currently its off our radar though.