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With the Dow climbing for six consecutive days and breaking fresh 13-month highs, the 0.91% sell-off yesterday was prompted more by timely profit-taking rather than plunging sentiment. After a one-day break, investors are already back in buy-mode this morning, as all three indexes are looking modestly higher. The question will be whether that confidence can last the morning. The trade balance is a never-too-pretty reminder of the nation’s growing debt, and consumer confidence is unlikely to surge with the unemployment rate hitting double-digits for the first time in 26 years just two weeks ago...

While scientific evidence is iffy, homeowners report enormous health and structural problems with drywall made in China. Insurance companies are already denying responsibility and the lawsuits are just beginning ...

What a turn around today for MBS! After being down as low as 100-30, MBS moved to close the day over half a point higher at 101-16! This is definite "striking distance" territory as far as all time high ranges are concerned which had their best weekly close at 102-07 and daily close at 102-18... The fact that the 10yr was closer to 2% than to 3% the last time that occurred should give you an idea of just how much the spreads between MBS and tsys have tightened. Performances weren't all that disconnected today if a few bps of tightening doesn't excite you. The 10yr had a decent day, dropping to 3.442 in yield. But MBS performed even better... The FN 4.0 ended the day +0-11 at 98-29 yielding 4.115% and the FN 4.5 went out the door +0-12 at 101-16 yielding 4.317%. The secondary market current coupon is 4.206%. That's good for a spread of 76bps from the 10yr to the current coupon! The tightening CONTINUES to lure us in to some sort of acceptance of it's longevity. But as we have said and will continue to say, such phenomena only last so long... The meaningful "drama" for today centered on the 30yr auction results. We got a very convincing headfake just following the release, but the entirety of the global trading community must have heard AQ say he expects a recovery.... Because shortly thereafter, it was off to the races all across bond-land... The tsy component of the chart above shows that the last few gyrations of the day were very much in line...

The Federal Reserve today reported on their weekly purchases of agency mortgage-backed securities (MBS). In the four trading days between November 5 and November 11, the Federal Reserve purchased a total of $45.29 billion agency MBS. In those four days the Federal Reserve sold $31.79 billion agency MBS coupons (dollar rolls). The Fed's weekly net purchases totaled $13.50 billion. ...

I've been hesitant to address this issue while I've watched it slowly unfold, but perhaps now is a good time to raise the red flag. Lackluster demand for the long bond can be viewed from a relatively clear cut point of view: with the economic outlook so uncertain, meaning there are several signs of recovery which are not supported by the underlying fundamentals, specifically the labor market and housing, why in the world would an investor want to loan their money to the government for 30 years?...

The annual independent audit report of FHA capital reserves published today shows that, while the reserve ratio has dropped below the level mandated by Congress, the agency is recovering and most scenarios show it continuing to meet its obligations....

Mortgages continued to hold firm with average rates below 5 percent for both long and short term loans. The 30-year FRM has now been below 5 percent for five out of the last seven weeks....

As you're aware, immediately following the auction, MBS prices shot down to 100-30, bringing things in line with the worst levels of the week. Tsy's exhibited similar behavior with 10's moving to 3.525. The yield curve steepened further and looked to be inching toward the all time highs. As you're also aware, we were expecting a correction within the range. But as you might not be aware until just now, we got it: The volume coming into the market at this point looks to trump Tuesday's tally, especially with some afternoon data on the way (fed balance sheet, fed MBS buying etc...). Of high importance is the fact that the post-auctions sell off only explored recent limits of the trading range. This lets us know that today's auction was not the massive market event that would prove responsible for deflecting the bond markets from their range. The yield curve remains slightly steeper on the day with 2's10's at 266.4 bps. A bit worse that Tuesday, and still very high, but not within striking distance of all time wides as of yet. This slight steepening correlates well with a slight preference for the higher end of the coupon stack. Last week's prepayment data led many analysts to identify opportunities in these premium coupons as well. So it makes sense that a steepening curve would add fuel to that fire. Though stocks also lost ground following the auction, they haven't made it up to the same extent as the bond market... To whatever extent the...

The Treasury just sold $16 billion 30 yr bonds... High yield: 4.469%. % Accepted at High Yield: 18.01% Bid to cover: 2.26 The initial reaction to the relatively weak results has not been MBS friendly. The 10yr yield has risen to 3.52% and the FN 4.5 has fallen below 101-00. While this reaction is "knee jerk" in nature, if prices dont rebound soon , lenders will reprice for the worse. I do however expect a correction

Early reports from fellow mortgage professionals indicate mortgage rates holding steady. The par 30 year conventional rate mortgage remains in the 4.75% to 5.00% range for well qualified consumers. There is not much room for MBS prices to move higher or for mortgage rates to move lower at the moment. If you are happy with the rate being offered to you and don’t want to risk rates moving higher, you should lock today. While there still is some room for MBS prices to tick higher, it is better to have locked when you should have floated than it is to float when you should have locked. ...

Not a bad concession built into the long bond before the auction. That said, 30s are somewhat oversold at the moment, currently testing yield levels not seen since late July. Year end is generally a seasonally supportive time for AAA assets, whether or not the market perceives current market pricing as "cheap"...we'll have to wait to find out. From a big picture perspective, nothing has really changed regarding the uncertain economic outlook. This implies the market will continue to range trade...meaning reactions to data and events are more of a reflection of current position and short term tactics rather than overall BIG PICTURE bias. Sometimes the news cooperates with these short term strategies, sometimes it doesn't. Given the market's recent willingness to let the yield curve continue to steepen, which is a function of the TSY supply set up, we are anticipating a corrective flattening trade to take place anytime now. So we sit, hands in pocket, whistling a random tune while we wait for yield curve bargain buying. ...

JP Morgan Chase Hiring Originators; YSP, RESPA, DU 8.0 Chatter; news from Flagstar and PennyMac...

In this week's release, which reports on loan application activity for the week ending November 6, 2009, demand for new mortgage loans increased 3.2% from one week earlier. The Refinance index rose 11.3% while the Purchase index fell 11.7%, its lowest level since December of 2000....

It may not be the most significant report on any given week, but there is usually a certain amount of cachet that comes with being Thursday AM's Jobless Claims report. But when today's 30yr refunding is in town, some of that prestige is put on hold for more important things (such as the final vote of the week on the health of the long end of the yield curve). And so it is that bond markets find themselves holding their ground despite a better than expected jobless claims print. In fact it almost seems that the 830AM data release coincided with support in MBS. More on Claims.... 502,000 (CONS. 510,000) FROM 514,000 PRIOR WK (PREV 512,000) 4-WK AVG FELL TO 519,750 FROM 524,250 PRIOR (PREV. 523,750) CONTINUED CLAIMS FELL TO 5.631 MLN (CONS. 5.70) FROM 5.770 MLN PRIOR (PREV 5.749) INSURED UNEMPLOYMENT RATE FELL TO 4.3 PCT FROM 4.4 PCT PRIOR WK (PREV 4.4) 4-WK AVERAGE LOWEST SINCE MATCHING 519,750 IN WK ENDED NOV 29, 2008 HEADLINE CLAIMS LOWEST SINCE 488,000 IN WK ENDED JAN 3 Normally, that would elicit a slightly more bearish move than bonds have experienced so far... Zooming out to a weekly view shows us the AM's movements have, in many ways, merely constituted a return to some semblance of a range boundary ahead of the more important 30yr bond auction. Underscoring the importance of the 30yr bond auction results, which we'll get at 1pm, is the general reduction of volume leading up to it. Indeed we saw far less volume than normal on 3 and 10 year auctions. This could...

In terms of data releases the week is only beginning now. Stocks have been rising this week led by the Dow hitting a 13-month high Tuesday and continuing to climb yesterday, but the drivers have been from outside the US economy. This morning the market is looking more cautious ahead of weekly jobless claims and the monthly deficit figures, as neither release is expected to be a harbinger of optimism. Dow Futures have fallen 38 points to 10,221 in pre-session trading, while S&P 500 futures are 3.75 points lower at 1,092.50. In addition, WTI Crude oil remains below the $80 mark at $78.57 per barrel, and Spot Gold is down $2.14 to $1115.26 (about $9 below the record highs earlier in the week.) The dollar is weaker this morning as it continues the play the role of safe haven despite increased concerns about its long-term value....