In overnight trading TSY yields moved lower after overseas markets reacted poorly to Alcoa's worse than expected 1Q loss. The NIKKEI, HANG SENG, TOPIX, FTSE, DAX, CAC, etc, etc are all in the RED after Alcoa, the biggest aluminum producer in the US, reported its first back to back quarterly loss since 1994.  

US equity futures  are currently indicating an open to the downside. Following a month long rally in stock markets and augmented optimism after FASB relaxed mark to market accounting policies...many market participants are now questioning whether or not the optimism was nothing more than a "bear market rally".  The timing of this shift in sentiment could be quite damaging to stocks as we head into an earnings season that is expected to be filled with sizable losses.

Mortgages have been taking their strategic guidance from the gyrations of the yield curve lately. This implies MBS have been subjected to the emotions of equity traders and its effects on the flow of money from stocks to bonds. When TSY yields move lower, MBS yields have followed, but yield spreads have widened in the process (TSYs rally more than MBS). When TSYs sell, MBS again follows, but yield spreads tighten (MBS doesnt sell as much).

There is however a disclaimer that goes along with this endorsement to gauge MBS pricing by tracking TSYs....MBS analyst models that compare relative value make a wide range of assumptions regarding the appropriate maturity TSY note to be comparing to MBS. This means I am unable to tell you which TSY note to monitor....although I can tell you that the duration of "up in coupon" MBS is quite short and thus making comparisons to the 2yr/3yr note/5yr note is appropriate. Production MBS have a much longer expected life...you should compare those coupons to the 5yr/10yr TSY (I use 10 yr swap).

Another disclaimer regarding the use of TSYs to track rate sheet movements: MBS prices are extremely rich at the moment so often times in the past month mortgages have detached themselves from rational spread behavior. Adding to that argument is the fact that it has been easy pickings for mortgage buyers looking to make a quick buck. Low volatility and high liquidity have functioned as a means to consolidate profits in a day trading manner.  All this means is often times you will be left scratching your head after TSY yields shoot up 5bps while MBS stays strong and steady.

The best solution to your rate sheet worries is to just keep reading me! :-D  

5 pm "Going Out" Marks....

FN30_______________________________

FN 4.0 -------->>>> +0-01  to 100-07  from 100-06

FN 4.5 -------->>>> +0-03  to 102-00  from 101-29

FN 5.0 -------->>>> +0-03  to 103-09  from 103-06

FN 5.5 -------->>>> +0-02  to 103-30 from 104-00

FN 6.0 -------->>>> -0-01  to 104-24 from 104-25

GN30________________________________

GN 4.0 -------->>>> +0-01  to 100-10  from 100-09

GN 4.5 -------->>>> +0-02  to 102-05 from 102-03

GN 5.0 -------->>>> +0-02  to 103-25  from 103-23

GN 5.5 -------->>>> -0-02  to 104-07 from 104-09

GN 6.0 -------->>>> -0-01  to 104-23 from 104-24

The 2 yr note yield is down 0.016 to 0.903. The 3 yr note yield is down 0.019 to 1.2905. The 5 yr note yield is down 0.024 to 1.8358. The 10 yr note yield is down 0.013 to 2.8854. The 30 yr bond yield is down 0.011 to 3.7059. Swap spreads are tighter from yesterday's close.

EFFECTIVE FED FUNDS: +0.00 to 0.14 from 0.14

LIBOR FIXINGS

O/N LIBOR:  -0.0175 to 0.2600 from 0.2775

1 MONTH:  -0.0094 to 0.4600 from 0.4694

3 MONTH:  -0.0106 to 1.1387 from 1.1494

6 MONTH:   -0.0159 to 1.6872 from 1.7031

1 YEAR:   -0.0163 to 1.9625 from 1.9787

Today is Class A Notification Day...that means tomorrow we start watching May FN/FG 30 Year MBS (and prices will drop overnight)

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