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In a week that promised to be eventful, MBS played the volatility role with the rest of the market, but left it's benchmark's in the dust when all was said and done. The measure of the secondary MBS market that takes into consideration the prepayment speed weighted yields as well as the production mix of MBS volume and expresses that notional yield at parity fell to 4.258 (that's secondary market current coupon, btw...). With the 10yr yield ringing the 3.5 bell right on the nose, that brought spreads between MBS and Tsy's to an eye-wateringly tight 75.9bps! They started the week at an already tight 87.9bps... Though I could try, I'm not sure there's much I could do to convey just how tight these spreads are... Well, I guess a chart might do... This is the current coupon spread versus the blended yield of the 5 and 10yr tsy. Over time, that 7.5 year notional yield is a better approximation than simply going with the 5 or 10 yr tsy exclusively (or the 7yr tsy for that matter). The chart shows that although we're not at historical lows, we are pretty much in line with the lowest points of the last 10 yrs. Now, if the competition were to see which era of MBS spread tightening achieved such tight yield THE FASTEST, there would be no contest. The pace at which Fed participation in the MBS market has tightened spreads is not only staggering, but abundantly clear from the chart above. The type of noise that the line encounters in 2009 tends to be what the graphs...

In breaking news, it has been determined that today's NFP report was all an elaborate hoax that was never intended to have any effect on the markets beyond today. Or at least that's how the headline could read at the top of the list of "things that would not surprise us." What do I mean? Nothing more than this: After all the sturm and drang of AM volatility, the market continues in the exact same direction suggested by it's previous trends, which would have been for a reversal at 3.56 (yesterday) and a continuation of the rally into today depositing us somewhere in the neighborhood of 3.5... For MBS, just an extension of previous trends as well (yesterday we warned against perceiving the rally in MBS as an indication of reversing downtrends from the beginning of the week, but given the broader market's reaction to NFP, that's in fact basically what happened...)...

President Barack Obama signed into law this morning legislation extending the $8,000 tax credit beyond its current November 30 expiration date. The bill also provides a tax incentive to veteran homeowners who wish to relocate....

Fannie Mae reported a loss of nearly $19 billion in the third quarter due largely to credit-related expenses. The resulting deficit has prompted FHFA to ask Treasury for an advance of $15 billion, the second cash infusion in three months. ...

We'd expect the wake of a much-anticipated NFP print to be volatile... That assumption isn't really a big leap of faith for most market watchers, and indeed that's what we're seeing. But as the volatility decreases, we're seeing suggestions of both stability and correction. Traders are preparing to cash in... So should you... Let's discuss the chart for a moment... Generally, today is a green one for MBS. I wouldn't even pay much mind to the outlying levels following NFP as those are merely the more violent death throws of the volatility that almost always peaks and begins to wane on the printing of this report. 101-00 looks reasonably supportive in a technical sense, and of course it always carries the "round number" psychological impact as well. Even then, it appears our analysis can venture even higher in price before becoming more uncertain, and ultimately bearish. Here are a couple of the "bottom lines" Spreads are tight, have been fairly tight for a while, have gotten tighter into today, are unlikely to stay this tight for long, and are never very likely to stay tight or tighten into rallies. conclusion: spreads likely unchanged at best into bond weakness and likely wider into rallies MBS prices are rich... not from the relative value perspective offered by spreads, but also in absolute price. Any time we're looking at 7 ticks or better on a 101 handle, we're within a point of all time highs... All time highs were experienced...

Risk retention will establish a necessary sense of ownership and responsibility at the origination end of the home loan process. But any risk retention debate is incomplete unless policymakers give equal weight to time to the need for transparency. One doesn’t work without the other. Investors in mortgage securities, once that market begins to function on it's own again, will have to be able to look at every single loan that makes up the package. Investors will need a reliable monitoring system that allows them to look at the performance and payment stream of each mortgage. That hasn’t existed in the past and the absence of transparency was as much a culprit in the housing collapse as the lack of skin in the game. Crafters of the systemic regulator bill should keep that in mind....

While price action has been volatile so far this morning, MBS continue to hold in the middle of the recent trading range. Because the Employment report was friendly to the fixed income sector, I am switching my outlook from lock to float. However, because we are seeing better rates this morning, there is nothing wrong with locking today to take advantage of overnight and morning improvements. ...

The 10yr note yield just rose to 3.54%. Hopefully we get some short covering there and a reversal. Unfortunately this is having negative effects on "rate sheet influential" MBS coupons. The FN 4.0 is now -0-01 at 98-12 and the FN 4.5 is trading -0-03 at 100-31 after hitting an intraday high of 101-16. ...

Lots of news from North Carolina, Fannie, Freddie, PMI, AIG, the tax credit; rates head lower after unemployment data...

Oct Non-farm Payrolls Worse than Expected at -190,000 vs. consensus -175,000 vs. Sept -219,000 (previously -263,000). Unemployment Rate: 10.2% vs. consensus 9.9% vs. Sept 9.8% (previously 9.8%). Highest unemployment rate since 10.2% in April 1983. August Non-farm payrolls revised to -154,000 from -201,000. July unrevised at -304,000. Average hourly earnings +0.3% vs. consensus +0.1% vs. Sept +0.1%, to $18.72 vs. Sept $18.67. Year-on-year average hourly earnings +2.4 %. Average work week 33.0 hours vs. consensus 33.1 vs. Sept 33.0. Aggregate weekly hours index -0.2 % vs. Sept -0.5 % ...

Trading is cautious ahead of the month’s most important indicator. Equities jumped more than 2% on Thursday on optimism for the labor market and positive earnings from blue-chip companies, but sentiment is more cautious in the final hour before nonfarm payrolls. Dow Futures continue to dance around the 10k level while S&P 500 futures trade half a point higher at 1,064. WTI crude is back below the $80 per barrel mark, but Spot Gold is up more than $3 to $1,093.38. Meanwhile, the dollar is weaker against the yen, euro, and Aussie dollar, but stronger against the Canadian loonie....

TOMORROW: NFP at 830AM Wholesale Trade at 10AM Consumer Credit at 3pm Ok... Of course anything can happen tomorrow, and probably will, but at some point in the reasonably near future, a "quantum of solace" should show up to the party... Not talking about your buddy bringing over their "Bond collection," but rather, our "collection of Bond" metrics is suggesting it's almost time to call our much anticipated FLATTENER (short term yields and long term yields become more similar) in as a missing person. What does all that greek mean? If short term and long term yields move closer together, either the long end goes lower, the short end goes higher, or something in between... And although there's plenty of overhead room in short yields that can push the 10yr (and probably production MBS coupon yields) a bit higher, the current economic state of the "world is not enough" to incite a massive yield spike in the short end. But even if you can get on board with that, why the expected tightening of the yield curve? The following chart is "for your eyes only." So, you're looking at the 2's 10's curve back to 1980's. The higher it is, the bigger the difference between 2yr yields and 10yr yields. Let's just say not even at Casino Royale could you find many takers to bet against a moderation of the curve. And with the recent FOMC statement, not even the Dr. No's and Peter Schiff's of the world can opine about...

In the five trading days between October 29 and November 4, the Federal Reserve purchased a total of $16.00 billion agency MBS. A gradual slowdown in daily purchases is expected to continue as the Federal Reserve wanes the mortgage market off it's support. However, up to this point the steady withdrawal has yet to affect the performance of MBS coupons versus benchmarks. This is a function of a generally slow pace of new loan production. In fact this past week, the Federal Reserves participation helped "rate sheet influential" MBS coupons greatly outperform their benchmarks. Thank the Fed that mortgage rates did not rise more this past week. ...

The price action in the 10yr is like a coiling cobra at the moment. A range beset by yesterday's 3.56 snd this AM's 3.515 has gradually narrowed into what must consequently be wherever it is the market wants to be ahead of the NFP report... The cobra's extended body gradually occupies a smaller and smaller footprint as it prepares to strike out... Either direction is possible... It's also possible that he may not see a sufficient opportunity to strike and the movements that undo the coiled position will be less directional... Regardless of that snake in the grass, the supportive-week for MBS has been decidely, well, supportive... As AQ mentioned earlier, we're seeing an uncommon occurrence in that MBS are extending whereas the yield curve is steepening. In plainer and simpler terms, that means that the preference in treasuries has been to shed the duration of the 10 and 30 yr securities in favor of the shorter end of the stack. Conversely, It's the lower coupon and hence LONGER duration MBS that have gained more price today than the higher coupon and hence SHORTER DURATION portions of the stack. That's a trend that's not likely to continue indefinitely, but for today at least, it's a good thing for anyone waiting on potential reprices for the better. Some have already been seen and others may follow before day's end. The current coupon continues in similar territory at 4.34655, and with a few bps of back-up in the 10yr, that puts spreads...

No one argues the extension of the tax credit has value to the marketplace. But what other immediate steps must be taken --- either by government or industry --- to create a sustained housing recovery? ...