Rates rose after a weaker than expected jobless claims print  was trumped by an unbelievably strong Empire State Manufacturing Survey. Following the 830AM data release, 10s touched 3.89%, the FN 4.5 fell to 99-28, and the yield curve steepened.

That didn't last long though....

The 3.625% coupon bearing 10 year TSY note is now +0-07 at 98-08 yielding 3.84%. YAY!!!

This happened in heavy trade flows too. Notice DOWN TRADE VOLUME was basically offset by UP TRADE VOLUME. To me this essentially confirms the theory that the rise in rates we saw this morning was indicative of traders testing the resolve of the recent rally. Market participants took an opportunity to buy at the price lows

Plain and Simple: After several failed attempts to move higher in price/lower in yield, rates traders wanted to be sure the market is comfortable with the 10yr note yielding 3.85%. It looks like we passed that test with flying colors.

We have been talking about the shape of the yield curve a lot lately. On Tuesday the 2s/10s curve flattened 4 basis points from 280bps to 276bps. This created some excitement for us. However the friendly bias toward "rate sheet influential" benchmarks was quick to reverse positive progress as the yield curve started to steepen yesterday and continued to loosen up in the early hours of today's session. While we did note healthy selling in 10s after 830 data, we aren't ready to blame a "disdain for duration" for the steeper yield curve. More so the steeper shape of the curve reflects healthy buy side demand for the 2 year note. Since 10s found stable footing around 3.89%, the 2s/10s curve has corrected and is currently seen at 282bps again.

The 2yr note yield is 3.2 basis points lower today. 10s would travel the road to 3.71% in a much smoother manner if 2s can break below 1.00%.

Currently I have the secondary market current coupon at its widest yield spreads of the day. Mortgages were lagging Treasuries into the sell off and they continue to lag into the recovery rally.  Wider yield spreads and lower prices are not a normal event in the agency MBS market. This implies buyers are still feeling the effects of some late day loan supply from originators yesterday (seen around 2 yards in after hours trading yesterday).  Once the MBS market can come to an agreement on a yield spread level equilibrium again...we should start to track Treasuries more closely.

That is the bad news. The good news is "rate sheet influential" MBS prices are well off their low prices of the day and REPRICES FOR THE BETTER ARE POSSIBLE. More so from early morning publishers and "price leader" types. Others will be slower to pass along price appreciations.

The FN 4.5 is currently +0-05 at 100-04 yielding 4.492%. The secondary market current coupon is 4.490%. The current coupon yield is 64.6 basis points above the 10 year TSY note yield and 68.5 basis points over the fixed leg of a 10yr interest rate swap. The current coupon is at its widest/cheapest relative valuation of the day.

If another anemic CPI print and continued dovish rhetoric from the Fed Chairman himself were not able to help extend the rates relief rally..I don't know what is. It seems like one big buy ticket might be enough to move the entire herd at this point. Make a move "buyers of size". Make a move...

re: LOCK or FLOAT

Over the past two days we have been favoring a lock bias. This bias was based more on lender strategies than price action in the bond market. While we feel benchmark Treasuries and "rate sheet influential" MBS have room to rally on, we do not anticipate mortgage rates will keep up.

This is where the principles of GUTFLOP should echo in your ear. You lost a considerable amount of rebate between March 24 and April 5. We decided to wait and out and let the market stabilize from a quarter-end lack of liquidity. This strategy proved profitable.

Since April 5 we have seen a slow restoration of lost rate sheet rebate. At the moment loan pricing is not far from its best levels of 2010....regardless of speculative theories which imply rates have room to run lower, you should be looking to lock up profits while they are available. You do not have to lock 'em all (if you have more than one. congrats bc many LOs have none), just don't "let it ride". If you are floating one loan...keep floating on a day by day basis. If you can make it down to a 15 day lock without sacrificing the cost of an extension...do it.

In the short term, as in today,  everyone should wait and see if broad based reprices for the better are offered up by lenders.