As treasury yields backed up modestly after the 5yr auction, MBS prices were forced downward lest mortgage spreads achieve levels of tightness only imagined by the waistband of my pre-"wife and kids" wardrobe.  And though sufficient danger of reprices existed to warrant an alert, we've since turned back and are heading in the right direction.

To re-touch this topic that the Ninja introduced yesterday, MBS spreads, as you may already know, refer to the difference in yield between an MBS coupon (usually the "current coupon" is used for the sake of a common point of reference, least encumbered by convexity or extension concerns) and some benchmark.  One of the most popular benchmarks (read: yardstick) is the 10yr treasury note yield.  Using this as an indication of a bond with a known duration and known return and known risk, we are better able to assign a VALUE to the otherwise subjective and variable MBS world.

As you can imagine, there are ranges for where this "current coupon vs. 10yr spread" has been throughout the ages.  The Ninja's point yesterday was to suggest that we are as tight as we've ever been, meaning that MBS yields have never been so close to tsy yields and with the fed exit looming, are not expected to get much closer.  Ipso facto, if treasury yields rise, they necessarily PUSH MBS yields higher, and thus rate sheets get less attractive.

With the 10yr note turning it's corner today at 3.71, a well travelled technical inflection point, interesting games are afoot.  The simple reversal of losses and positive price movement is enough to get us out of danger for today, but it leaves us, well, um, dangerously close to the, hmmm,... for lack of a better term: danger zone!

Reason being: if tsy yields cross 3.71 on tomorrow's data or events, it's nature as an inflection point suggests it will be more difficult than not to break back through.  And if that indeed bears out, we'll have run out of road--"highway" if you will--in the race to stave off increasing rates into 2010, at least until the next Greek Sovereign Debt Drama hits the screens (or consumers actually lose so much confidence the index goes negative!). 

If this all seems a bit too dramatic for a relatively subdued response to a day with Bernanke and an auction, that's because it is.  Netflix accidentally sent me "Top Gun" instead of "More Boring Facts About Bond Market Uncertainty: volume 347."  Well, whatever...  I work with the material I'm given...