It's pretty obvious judging by market movements after economic data that the markets are and have been trading on emotion for some time.  What else would we expect in panicky and unprecedented times?  Thankfully, one of the more stable sectors in the midst of this chaos is MBS, as they move up less when fixed income rallies, and down less during sell-offs.  This past week saw it's fair share of each, and left MBS much tighter to treasuries yet again.  Just as has been their wont, when tsy's sold, MBS held their ground fairly well.  But that recalcitrance remained during rallies as treasuries outpaced MBS.  Fortunately, the net effect was a gain in terms of spread.  In a nutshell, this means that for any given treasury price over the past few years, MBS are a little better than they have been.

During the crux of the meltdown, spread levels extended above 300 basis points, meaning if a 10 year treasury were at 3%, an MBS with an average life of 10 years would be 300 basis points higher or 6%.  In fact, we crested the 350 level, but are now approaching 200 bps.  This might seem like an amazing improvement, but compared to historically less-uncertain times where spreads steadied under 100 bps, we still have another percent at least of "certainty money" that can make its way back into the market as the knife continues to drop.  Also contributing to our felicitous underdog position is the additional primary spread we still have.  Although it has tightened as expected, it's still not "normal."  This means that when an MBS coupon is at 101-00, hardly any lenders have that coupon rate at PAR on a rate sheet whereas we'd normally see 4-5 lenders giving that out at PAR in less whacky circumstances.  So those are two spreads that can and probably should continue to tighten as this mess continues to be sorted out.

Speaking of sorting it out, the broad market got a jolt of optimism last week for sure, with the Dow gaining over 8%.  Just as happened the first time we rallied off November lows, many a pundit is calling an inception to the recovery.  And now enters the concept of "emotion."  Anyone calling an end to the economic contraction is obviously not looking at the economic data and fundamentals in the same way they might in a calmer environment.  Emotion overrides reason.  "Sure, I would normally not be ready to start buying equities based on these technicals and fundamentals, but damn Man!  Look at how low the dow is!  Look at how much it's sold!  SURELY, it HAS to come back up after being this low!!!"  Emotion, emotion, emotion...  Many a similar statement was made when the Dow hit 10,000.  

So how do we all take the appropriate postion with respect to our mortgage pipelines?  Essentially, when the markets are emotion-driven, we have to be more sensitive to the "day-trading" mentality.  Markets tend to trade more on technicals than fundamentals, whether those driving the markets are actually technicians or not.  This means that even normally supportive economic data or flow data can, at times, take back seat to the broader emotional stance of the market.  We've seen this play out numerous times over the past few weeks and months, and it doesn't show signs of stopping soon.  So first and foremost, we GUT-FLOP.  Beyond that, we start to backwardize our evolutionary thinking on MBS to use terms like "overbought and oversold."  In other words, even if fundamentals support further gains, if we've already seen appreciable gains over the past few session, the liklihood of extending gets smaller and smaller.  

We've been inextricably range-bound over the past 3 months.  If you GENERALLY lock at the highs of that range, and float at the lows, you'd be a huge net winner.  So we'll be keeping you explicitly up to speed on what's happening in that range.  No graph right now, but soon.  Right now we're slightly towards the high side, indicating we could be seeing some Up-In-Coupon movements this week.  There's no guaranteeing it will happen, but certainly, it's a risk worth protecting yourself against with some GUT-FLOP.  When available, get the best of both worlds with overnight price protection, float downs, and aggressive renegotiation lenders.  UIC has support from a stock rally that may find the stamina to continue a bit longer thanks to afore-mentioned emotion.  Tsy's, having fallen back under 3% on the 10 yr last week, may yet again, embark on this leg of its cycle of supply concerns and back up a bit in yield, raising the basis for MBS, further edifying potential UIC.  

The nice thing is that none of these upwards movements should be catastrophic, especially when mitigated by the not-insignificant amount of primary spread tightening that could offset the raw price losses.  Still, let Sun-Tzu's thoughts on preparation guide you.

"To rely on rustics and not prepare is the greatest of crimes; to be prepared beforehand for any contingency is the greatest of Virtues."

APRIL FN30______________________________

FN 4.0 -------->>>> -0-06 to 98-30 from 99-04

FN 4.5 -------->>>> -0-03 to 101-00 from 101-03

FN 5.0 -------->>>> -0-01 to 102-08 from 102-09

FN 5.5 -------->>>> +0-00 to 102-30 from 102-30

FN 6.0 -------->>>> +0-00 to 103-18 from 103-18