Good Morning.

Stocks and bonds traded in a volatile manner last week as cash continued to seek out a liquid marketplace. Risk aversion remains the favored strategic bias.  Fundamentally there are a confluence of issues at hand, including but not limited to: global deflation, sovereign debt defaults, ballooning budget deficits, a seemingly inescapable reliance on government support, financial reform, domestic and foreign elections, and a recalibration of economic growth expectations. Whatever ax you choose to grind, numbers speak louder than words and a major shift in currency and commodity valuations has moderated demand for risk and forced cash into safe haven assets like government guaranteed U.S. Treasury debt. The result for mortgage professionals: Near Record Low Mortgage Rates

While our first reaction to falling mortgage rates is generally YAY...a sobering reminder sets in every time an appraisal is ordered or a loan file is uploaded to DU/LP. Record low mortgage rates are great...if there are willing and eligible borrowers with stable collateral values. The recent retracement in equities also reminds us that the housing market, like many others, is fragile and must learn to deal with "the new normal" where clogs in the distribution of wealth, financial reform, increases in productivity, and new government business processes (less contractors, more inherently government jobs performed by government employees) will undoubtedly lead to a protracted period of high uncertainty and nervous sentiment.

Plain and Simple: the road to recovery is LONG and filled with potholes. There will be ups and downs in asset values as financial markets consistently debate the resiliency of the global economic machine.

The week ahead is busy. Besides the MBA secondary market conference, we get several housing indicators, some Fed speak, 2yr/5yr/7yr Treasury auctions, and consumer spending data. Mortgage rates should be a few bps better today after a modest move lower in stocks last night led investors to re-allocate funds into risk averse benchmark Treasuries....which helped "rate sheet influential" MBS prices open higher. 

Stocks fell early in the morning when U.S. traders returned to their screens and priced in a weekend bank failure in Spain. The Spanish government took control of Cajasur, a savings bank whose merger deal with another regional lender collapsed. Stocks have since disconnected from forex markets and the S&P is now off only 0.63% at 1180. The next major test for the S&P is 1085...

10s moved mostly sideways overnight before the stock lever sent yields lower in the early AM. The 2s/10s curve is 2bps flatter at 245bps. The 3.50% coupon bearing 10 year Treasury note is currently +0-14 at 102-21 yielding 3.187%.  The trend channel is consolidating in a bearish manner but directionality is still highly dependent on the sentiment of stocks. Support lies at 3.21% then 3.25%. Resistance at 3.16%....if the S&P fails a probe of 1085, yields should hold steady in the recent range.

The FN 4.0 is +0-05 at 99-21 and the FN 4.5 is +0-04 at 102-09. The secondary market current coupon is 2.4bps lower at 4.051%. Yield spreads are wider as rising dollar prices and negative convexity are not being friendly to relative value. The CC yield is +86bps over the 10yr TSY note yield and +80.3bps over the 10yr interest rate swap. 1M LIBOR is +0.0024 and 3m LIBOR is +0.0128.  3m10y implied vols are a shade higher but well below the highs seen on Friday (delta hedging out the wazoo thanks to price volatility around options expiry).

The FNCL 4.5's chart pattern is looking bearish, however once prices consolidate into support, a bounce higher at 102-05 is not out of the question.  Again, directionality is a function of the stock lever.

Worry is interest paid on trouble before it's due....