Let's not beat around the bush. The 5.5% coupon fell 13/32nds this morning bringing us to 100-04. Ouch! That's going to pull off at least a half a point of yield spread from yesterday.
The reasons for this are not entirely straightforward. Jobless claims released today were 365k. This was better than the expected 370k, but still maintains a low moving average, and keeps the level of continuing claims over 3 mil. However, the markets interpreted this "turn around" as a potential early sign of a recovering labor market. Thus, stocks are up a bit, and a blow was dealt to bonds.
Another potential contributing factor is a speech by Fed Gov Kroszner in which he discussed the long and lonesome road to recovery in the mortgage market. He didn't really say anything unexpected. But the component that traders may not have enjoyed was the notion that recovery would be slower and that more regulation would be needed.
There is limited news for the rest of day with treasury auction announcements which are of limited importance (usually), and then the money supply at 430pm Eastern.
One of the other ancillary factors was the opinion of Bill Gross of PIMCO, who is nearly synonymous with the "bond market." He believes inflation is currently being underestimated by 1%. Sure this is just the opinion of one man, but it carries significantly more weight than many analyst expectations combined. As traders consider that inflation may indeed be worse, bonds will sell and rates will go up.
The final slap in the face came just now as OFHEO released their Home Price Index. The short version of the story is that the year over year, it's down 3.1%, the largest decline in the indexes 17 year history. Depreciation in the real estate that secures the mortgages that collateralize MBS, it can have an effect on MBS pricing, much less of an effect than you would think, but an effect nonetheless.
So I'm sorry it's bad, bad, bad, bad, and bad this morning. But the cards are dealt and now the question is how to play them. I'll be floating for now and I recommend the same if, and only if, you can keep a constant watch on 10 year treasury prices today and refresh this blog every 20 minutes. That will be a boring endeavor if no major movement occurs, but if we tick down far enough to risk a reprice, you can find out here, and then send in the lock.
Stay tuned...