Hi. Hello. How goes it?

My cold medicine has just about worn off and my nose just announced it plans to challenge Usain Bolt for the 100 meter world record. Ugh I hope I dont have swine flu...

Led lower by financials, equities ended the day in the red for the first time since Sept.1 (last Friday doesnt count). This occurred in well above average trading volume too! The S&P closed -0.30% at 1065.

In the rates market the 10yr note yield is trading at a bid side yield of 3.38%, 8 bps lower than where it was priced this time yesterday afternoon. 10yr futures contract volume was above average at 810,000, but not as strong as yesterday's read over 1,000,000 contracts traded. 2yr notes were the "main attraction" as that sector saw the most trading volume today. After taking a beating yesterday, the 2yr note yields fell to .94% after moving above 1.00% early this AM.

Price action was choppy...short covering was noted, as was profit taking. 10yr contract volume accumulated/distributed at a 116-21 near 3.50%, at 116-29 (10AM), then at 117-06 (after  lunch).

The yield curve is flatter. 2s/10s is holding at a spread of 244bps. Here is illustration of yield curve flattening...

Mortgages followed TSY prices higher today. The FN 4.5 is currently +0-16 at 100-29, holding close to the 100-30+intraday high. Rate sheet influential coupons slightly outperformed benchmarks today. Yield spreads on the FN 4.5 and FN 5.0  are barely tighter.

Here's the two day...

We have the current coupon at 4.33%...8bps lower than the 5pm "HEAD FOR THE EXIT" book marking yesterday

Looking ahead...we will continue to take our directional guidance from the gyrations of the yield curve. I know it can be hard to stomach the chopatile rates environment...but keep telling yourself the range will moderate. Its a trader's world. I would still be selling into strength though. If momentum accumulates. 3.36 is next test for 10yr, then 3.32, then 3.27. If we go the other way, 3.49/3.50 remains strong support. We would be positioning ourselves for a flatter curve...should be good for MBS market (until Fed stops buying!)

Mortgages continue to trade well in both price (yay for loan officers) and in relative value (yield spreads tighter and tighter...OAS negative) This reflects the Federal Reserve's $$$ mandate to provide liquidity to originators looking to hedge their loan pipeline from interest rate risk.

Prices are higher, yield spreads are tighter....and LENDERS REPRICED FOR THE BETTER today. All in all a good day. Yay to unexpectedly strong rally in long end of curve today!

Im done for the day. Time for sleep. NO SWINE FLU!