Good Morning. Happy Friday.

My day begins on a positive note....not because of anything going on in the marketplace....because the Caps WORKED the Pens last night.

As Silky Johnston would say: HATE HATE HATE

Yesterday the bond market benefited from a bull flattening flight to safety bid as stocks suffered from regulatory overload...well perhaps I should say "proposed" regulatory overload. More or less, the Obama Administration failed to provide any useful details as to how this policy might really play out. That said, I view yesterday's "event" as nothing more than political poo slinging and policy rhetoric, perhaps to distract the herd from a Democratic defeat in the Bay State. Nonetheless, the resulting effect was to SELL STOCKS NOW AND ASK QUESTIONS LATER. This turned out to be the best event of the day for the rates market as nervous investors re-allocated funds from risky assets in the equity market to risk free assets in the bond market.

As you can see below, the S&P broke significant support levels yesterday. Could this be the end of the line for the equity bull freight train??? After all my attempts to pick a top in stocks, I have given up on forecasting the emotions of the equity market.  If the S&P breaks 1100 its good for bonds, but only if 1100 is broken and the market heads short. If this is nothing more than a KNEE JERK SELL OFF, trader's will view this as an opportunity to do some bargain buying. While my economic outlook is slanted in favor of the bear's camp, I still see room for the S&P to run up to 1200. It is what it is though.

The 3.375 coupon bearing 10yr TSY note finished the session +0-15 at 98-06 yielding 3.595%. The "rate sheet influential" FN 4.0 was +0-09 at 98-04 yielding 4.18% and the FN 4.5 went out +0-07 at 101-01 yielding 4.395%. The secondary market current coupon was 4.363%. The CC yield was 76bps over the 10yr TSY yield and 66bps over the 10yr swap rate. MBS failed to keep up with benchmark TSYs over the course of the rally. Below is a chart of the 10yr note. 3.62 is a major inflection point/test which we must get by if this "relief rally" is to evolve back into the days of the 3.27-3.50 range trade.

Beyond 3.62% resistance I see 3.58% as my next pivot point followed by 3.55% then 3.52%. Overhead support lies at 3.65% then 3.68% then 3.71%.

Although not as much as most originators would have hoped, many lenders repriced for the better, bringing mortgage rates to their lowest levels since early December. While our economic outlooks are well aligned with bullish momentum in the bond market, I remind of the environment we have operated in over the course of the past year. It is still a trader's world: stay defensive of pipeline profits. More specifically, in regards to yesterday's forced buying rally, this is from MBS MORNING yesterday:

Plain and Simple: while the spike in TSY trading volume is supportive of an extension to the rates "relief rally", the underlying motivation behind boosted bond market optimism is forced buying. This leaves the FLIGHT TO SAFETY rally in the bond market susceptible to a selloff (unwind of protective positions), especially if new details come to light that clear up confusions and calm the concerns of bankers and traders who now have to wonder if their business models are useless.

Yeh...thats the reality of yesterday's regulatory announcement, no one has a REAL clue as to what is going to happen in the banking industry. Waiting for more details...

Global equity positions did not do so well overnight: SHANGHAI -0.96%, HANG SANG -0.65%, TOPIX -1.58%, KOSPI -2.19%, NIKKEI -2.56%. The CAC is currently -1.13%, the DAX -0.98%, and the FTSE -0.92%. overnight trading. US stock futures are also weaker, albeit off the overnight low and mostly sideways. Again, 1100 is a very important support level for the S&P. SEE COMMENTS ABOVE....

US TSYs tested 3.58% overnight but failed to maintain progress. Above I called attention to the 3.62% pivot point. Below I zoomed in on the 10yr chart to show you how trader's keep migrating back toward this inflection point. The 3.375% coupon bearing semi-annual paying 10yr Treasury note is currently -0-04 at 98-01 yielding 3.613%.

Rate sheet influential MBS coupons are giving back a few ticks to start the session....blame the above retracement in "rate sheet influential" benchmarks. The FN 4.0 is -0-04 at 98 rock yielding 4.192% and the FN 4.5 is -0-02 at 100-30 yielding 4.408%. The secondary market current coupon is 4.376%. The CC yield is 76bps over the 10yr TSY yield and 65bps over the 10yr swap rate. We are playing follow the leader with the gyrations of the yield curve. MG  likes 100-30 as a pivot in 4.5s, I like 101 the dollar. If he requests an offer I am sticking with 101-00,  I am trying to get lifted early on today! MGs inflection point is backed by technicals, whereas mine is psychological.  I'll lock you down at 101-00+ for $500mm MG...DEAL?

The day ahead is data less, thus forcing market watchers to look extra hard for trading motivation. This allows rumor and gossip to gain more traction in the marketplace....with that in mind I repeat for the third time in the past 24 hours:

Plain and Simple: while the spike in TSY trading volume is supportive of an extension to the rates "relief rally", the underlying motivation behind boosted bond market optimism is forced buying. This leaves the FLIGHT TO SAFETY rally in the bond market susceptible to a selloff (unwind of protective positions), especially if new details come to light that clear up confusions and calm the concerns of bankers and traders who now have to wonder if their business models are useless.

STAY DEFENSIVE until yesterday's positive progress is confirmed. This means you should be locking in some loans. GUTFLOP!!!

NEXT EVENT: Barney Frank hosts a hearing on Compensation in the financial industry. Should be entertaining. 3 witnesses: 2 college professors and 1 editor of a financial publication will deal with the wrath of Barney

PS no I am not trading that position. If I was I would surely hit MG for a lack of size in his trade.