The Numbers:

 6.0% FNMA is up 2 / 32nds at 100-30

5.5% FNMA is up 2/32nds at 98-20

Both of these are the same as yesterday's levels

 
The News:

  •  ISM Came in at 50.2 versus expectations of 48.7
    • This is bullish news for the economy, but is not having the crushing effect it might if the margin between actual and consensus was higher or if the figure itself were farther north.
    • The Prices Paid component of this report being at 91.5 is egregiously high.  not a good inflation indicator, but largely written off to fuel costs
  • Construction Spending
    • Forecast to be down .6, but only down .4
    • The non-residential components of this report are the only things keeping this better than expectations.  Spending on residential construction was actually the lowest since July 2007
    • Nonetheless, a  better than expected headline is not good news for bonds.
  • Lehman Brothers
    • 100% Stated NOO anyone? 
    • They are under attack yet again from speculators saying they'll need to sell.  Their stock was at an all time low in recent days
    • But  after Morgan Stanley came out recommending a target buy price of 31 dollar a share, things have stabilized for the MBS giant so far.
    • Still, this uncertainty is likely adding to the spread problems we have seen this morning.
Conclusion:
Ailing stocks continue to keep MBS positivity on life support.  By all rights, MBS should be down, but with stocks failing to capitalize on the favorable data, fixed income has not sold off, and although spread remains higher Day over Day versus treasuries, the total decline in bonds hasn't been enough to push MBS out of bed yet.  but it's close!  We have a shortened week to start considering as the day after tomorrow is NFP (non-farm payrolls) day.  Analysts may revise estimate for ISM slightly higher from the already positive 51.0 call for the Non-MFG survey. 
 
Payrolls are only forecast to decline 50k, while jobless claims forecast to hold relatively steady at 385k.  Some analysts are calling for significantly worse NFP which would be about the only thing that's going to get MBS to improve.  Either way, some day soon, bond traders will start cashing in their chips, even if only briefly, and we will have the losing day we've been waiting for.  Whether or not today is that day remains to be seen, but so far so good.  despite peeling off 3-4/32nds, the curve is holding steady STILL at 100-29, a 1 tick improvement over yesterday's close.  Stocks and headlines will set the tone for the rest of the day.  As always, we need to be watchful of a meaningful stock rally (100 pts in the Dow give or take)

Lock or Float:

It almost defies logic, but we are, ONCE AGAIN, floating (if you didn't lock on yesterday's down tick).  Current coupon prices seem comfortable hovering around this 101-00 range, so it will take some appreciable action from other sectors to get us off this fence for better or worse.  As far as today is concerned, most every lender waited for the data before pricing.  Very likely, their price target for a reprice for the worse would be the price curve touching 100-24, or holding at 100-25 to 100-26 for more than a brief moment.  Of course, you'll know when and if that happens so, with a vigilant finger on the lock button, floating makes sense today.

Look for big moves on Thursday as traders interpret the data in order to take positions of the long and patriotic weekend.  And what's more patriotic than a stock rally?  It has to happen some time, so why not Thursday?  Either that or the patriotic thing to do is to entrench one's self in the security of Uncle Sam by buying bonds.  If UST's get the spotlight on Thursday, MBS, at the very least will be invited on stage to play backup.  Since Thursday's data hits well before any lender pricing, and since it is one of the most important reports of the month, chancing with a float is risky business, especially if your closing is approaching quickly.  If we stay floating today and tomorrow, locking should not only be heavily considered tomorrow afternoon, but it is probably the more advisable call.  The advisability of that call will be much more apparent after we see what tomorrow holds for us. 

 Medium term (20-40 days) risk is also quite high.  Either we have turned a corner off the years lows, which usually occur in mid-summer, or we have farther to go until reaching that bottom.  The price action on Thursday and Monday should offer us some clues regarding that phenomenon.  Whatever the case, keep in the back of your mind the general tendency for markets NOT to string together numerous days of linear directionality.  No matter what direction we are headed, we won't be walking a straight path.

As we finish out the report for this morning, it's good to note that UST's have not yet been able to push MBS out of bed.  The 5 yr is now only 2 ticks variance from the 6.0 on day over day price action.  This was much wider earlier.  So investors are hanging on to the premiums as UST prices move lower, yet more support for the "just right" temperature of 100-28 to 101-00 for current coupons.  Looks like bonds have a tough fight on their hands to stay positive on the day, so stay tuned.