So far, not a very happy morning for the bond market, unless you care about the fact that MBS are performing significantly better than treasuries.

The UBS and Lehman news is fueling a stock rally.  The higher it goes today, the more it will hurt bonds.  Hopefully that pain continues to be less for MBS relative to treasuries.

Adding fuel to the fire are better than expected numbers on the ISM coming in at 48.6 as opposed to estimates ranging from 47.5-48.0.  (looks like those who said NAPM would be a good indicator were correct, at least for this month).  This still signifies contraction, but not quite as much as the consensus estimate would have.  As I indicated last week, analysts, after being continually shocked by weak data, have started to estimate a bit more conservatively.  Thus we are still posting historically unattractive numbers, but because of analysts expectations, even worse numbers are "baked into the cake" so the better-than-expected-but-still-pretty-crappy numbers give the markets a bit of a boost and don't do anything to help mortgage rates come down.

Also, construction spending came in at -0.3%, much better than the consensus of -1.1%.  In light of the other data today, this is not of major concern, even though it would be salient in the absence of headlines.

I'm pleased to tell you that MBS, at least in these 15 minutes following the ISM announcement have held their ground admirably with the 5.5% coupon staying at 101-19 to 101-21 range.  Meanwhile, the 10 year treasury has taken a dive off a cliff.

If you didn't lock on yesterday's last update, it's a tough call to make a recommendation now.  We still have tons of important data this week and sometimes I get the impression that the stock market has a psychological optimism that defies the indications of the data.  In a vacuum, stocks would improve simply due to this psychology.  So if we add better than expected data this week it will be a bad one for MBS.  If employment numbers are dismal, Friday should prove to be a good day.  The consensus numbers are probably not quite aggressive enough considering the economic turmoil, so I'd tend to say we'd be on the weaker end of the consensus range.  If you disagree, and you have loans to close in the short to mid term, MBS are still fairly good today and locking might be the best option.

MBS and many other securities are cyclical: they go up and come down within a certain range, unlike the Dow (we hope) which despite ups and downs, generally trends up.  So precedent informs us that MBS will indeed worsen at reasonably regular intervals in the last 6 months.  I'll attempt to get a graph of this phenomenon for you later today.  If the market data continues to be better than expected, it could fuel one of our troughs.  Stay tuned...