The previously mentioned "good start" has continued basically unchanged since AM price levels.  The bulk of today's potential directionality rests with data and events that are yet-to-play-out including ISM numbers in about an hour as well as Bernanke testifying.  Three other Fed speakers will have taken the stage by day's end. 

FN30________________________________

FN 4.0 -------->>>> +0-05  to 100-06  from 100-01

FN 4.5 -------->>>> +0-04  to 101-28  from 101-24

FN 5.0 -------->>>> +0-03  to 102-27  from 102-24

FN 5.5 -------->>>> +0-01  to 103-18  from 103-17

FN 6.0 -------->>>> +0-02  to 104-19  from 104-17

GN30________________________________ 

GN 4.0 -------->>>> +0-05  to 100-08  from 100-03

GN 4.5 -------->>>> +0-03  to 102-02  from 101-31

GN 5.0 -------->>>> +0-04  to 103-15  from 103-11

GN 5.5 -------->>>> +0-02  to 103-27  from 103-25

GN 6.0 -------->>>> +0-02  to 104-13  from 104-11

Graphically, you can see that we've basically doubled yesterday's late gains this AM while the 10 yr tsy yield has fallen.  Futures are pointing to a relatively flat open (not on the graph) after breaking out from a tight range late yesterday.

MBS Directionality of late has largely been a story of their muted response to more violent treasury movements.  So what is the treasury story at the moment?  In two words: quarterly refunding.  In more words you ask?  It's an auction-heavy week for treasuries as scheduled offerings abound including the 10 yr.  This would normally stand out as much more of a "supply event" than it does now against the backdrop of all the unscheduled offerings used to fund recovery efforts.  In fact, the labelling of this week as "quarterly refunding" is really at moot point considering it's "just another auction week." 

The headline however, labelling this as the largest refunding on record served to give a right 'ol spook last week to treasuries.  That helped push the 10 yr yield over some technical resistance, which is generally more important to the treasury side, and it appeared to be the beginning of the end, at least in the short term, for low tsy yields.  But as we began to discuss yesterday, this "bandwagon effect" may be a bit overblown and premature considering both the uncertainty of continued directional recovery and our previous experience with federal intervention.  In other words, continued weakness in treasury prices would rely on the assumptions that there are not any more dark times ahead for an economic recovery, and that the Fed et. al. would accept their precious MBS benchmark rising to a point that it sabotages their commitment to mortgage rates. 

Sentiment to those effects, are on a fence at the moment, waiting for precious clues from the numerous fed speakers today, but most importantly Dr. B coming right up.  The fed originally had wanted to schedule one additional speaker today beyond the current FOUR so they could field a full FIVE and thus go with the originally intended CINCO De CINCO De MAYO theme.  But even though those Federally Funded Corona's are not on the menu today, the beginning of quarterly refunding (read: another big auction week), combined with four fed speakers including Bernanke goes a long way indeed to speak to one of if not THE most important concern for MBS these days: the yield curve.

So we finally get to MBS? 

Yes.  It's like a broken record at this point: stable MBS taking directionality queues from more volatile treasuries.  "In their own world," "insulated," among others are terms we've used to label MBS.  The bottom line is that they have not been moving nearly to the same degree as treasuries.  But it is important to note that as treasuries move and alter the yield curve, the MBS stack adjusts with the minimum necessary reshuffling to adhere to the emerging yield curve duration appetites.  In even simpler terms, if longer term money gets the shaft in tsy's, lower rate MBS coupons will also, though usually not to the same extent during sell off's.

And that "not to the same extent" has been the other major story of MBS.  SPREAD TIGHTENING.  Simply put: the yields of MBS are falling to be closer and closer to the yields of tsy's.  Many have been expecting this to be the result of the Fed's involvement in MBS.  But having achieved recent levels, continued tightening was not seen to be as certain by some market participants.  The boys in the back room here, however, including Bill Berliner, myself, and AQ, see continued potential tightening based on historical spreads and the other variables at play in the current environment.  So what preceded is a very long way to say, all is as it should be, and looking at MBS in recent sessions seems to have almost more to do with watching the yield curve than with MBS flows themselves.  After all, when we know that any supply will be (mostly) soaked up by the Fed, flows can take back seat for a bit.

Additional support of this "all as it should be" idea comes in the form of the day over day chart which shows that we have stayed above our key, long term support line with uncanny predictability, yet neither have we had any dramatic spikes upward since the mid march announcement that the Fed would buy more MBS. 

What a line eh?!  Sadly, with each passing day, the chances of it continuing to be a floor diminish, unless events drive treasuries a bit lower and help us create a new, higher range.  Regardless, the most important role of the line is to serve as a "trigger" alerting us to the liklihood that it will act as a ceiling if we cross it meaningfully and hold those lower levels over the next session or two.  We've extended these bounces so long that anything could happen at any time, especially today, but until it DOES happen, we can wait and be reactive for once.  Speaking of that, Bernanke and ISM will be out soon so we'll turn our efforts to that analysis for you coming up next.

(update 7:05 AM) - ISM rose to 43.7, slightly higher than the 42.0 forecast.  Market reaction minimal so far as all eyes on Bernanke who just started the testimony.  But this is already released for those wishing to read rather than listen).