Following a well bid 10 yr auction MBS coupons have returned to their range...except now our previous overhead resistance level, 100-06, has turned into our downside support. In the Treasury market, that same ol' short term strategy is still in play, investors are setting their entry and exit points and sticking to their guns (RANGE TRADING).

Since 5pm "Going Out" Marks....

FN30________________________________

FN 4.0 -------->>>> +0-04  to 100-09  from 100-05

FN 4.5 -------->>>> +0-06  to 102-02  from 101-28

FN 5.0 -------->>>> +0-02  to 102-29  from 102-27

FN 5.5 -------->>>> +0-02  to 103-20  from 103-18

FN 6.0 -------->>>> +0-04  to 104-22  from 104-18

GN30________________________________ 

GN 4.0 -------->>>> +0-05  to 100-13  from 100-08

GN 4.5 -------->>>> +0-06  to 102-09  from 102-03

GN 5.0 -------->>>> +0-04  to 103-19  from 103-15

GN 5.5 -------->>>> +0-03  to 103-30  from 103-27

GN 6.0 -------->>>> +0-05   to 104-17  from 104-12

UST10YR: 3.1574

2s vs. 10s: 219.46

Dow: +101 to 8512

Many are wondering if this strongly bid 10 year auction is an indicator of lower interest rates to come. In the short term (as in tomorrow and Friday), the successful auction isnt a sign of a change in sentiment or bias...it was more a function of traders doing a good job positioning themselves ahead of auctions. Looking farther out....one can postulate many theories regarding the steepness/flatness of the yield....but we will continue to stand by our position that Treasuries are range bound pending some form of confidence restoring communication from the Fed regarding their participation in the Treasury market (or just more open market spending).

In terms of the yield curve and its relation to MBS....even as the yield curve has steepened (2s/10s holding near 220bps when it was at 195bps pre FOMC meeting), MBS have held steady and even outperformed selling Treasury notes. This is a function of super liquid artificial demand for "rate sheet influential" MBS coupons...the Fed!!! (Yield spreads widened up today as the FN 4.0 was already uber tight and could not keep up...uber tight as in +70ish/10yr swap). That means that we can somewhat overlook the gyrations of the yield curve because the Fed is doing their best to keep mortgage rates low. But how much more can MBS outperform TSYs?

To put this discussion in the right context, instead of asking how much more can MBS outperform TSYs (how much tighter can yield spreads get)...We should ask...Will the FN 4.0 venture back to the 101 price handle like it did in late April? This is where we can make a relationship to Treasuries. The FN 4.0 moving closer to 101 is not likely with the 10 yr note bouncing around 3.13/3.20....however if 2s/10s flatten back out around 200bps...it could darn well happen again. It should be noted that the record high price level for the FN 4.0 didnt last too long though...richprices brought out originator selling in masses which basically overwhelmed the Fed to the point where they could actually afford to let prices cheapen up a few ticks without detrimental effects to primary mortgage rates.

Not too worry...when you take in the big picture, meaning you have to consider the shape of the yield curve (10 year is 40-50bps higher than it was a few weeks back)....we are doing awesome!!! But unless the yield curve flattens out a bit...its gonna be tough to reach those late April price levels again. Then again we've seen crazier events happen though (like +70ish over the 10 yr swap when the Treasury is dumping $71bn in supply on the market)

DOES ANY OF THIS CHATTER REALLY MATTER IF INVESTORS DONT PASS ALONG GAINS????

HMMMM...waaaait a minute...

If you are not getting raw rate sheets and are frustrated with your pricing...see secondary...dont blame the investors because I am looking at several aggressively priced rate sheets out there right meow :-D. Not going to go into great detail about how aggressive but lets just say I see 4.50 paying around a point.

Remember that mortgage supply chain discussion we had? The farther down you are..the bigger haircut you get!

Sorry if I ruffled your feathers....