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

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

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 %

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

When the yield curve steepens, it implies interest rates will be higher in the future. If interest rates are expected to increase in the next 10 years, then the borrowers who are refinancing at current market interest rates will be less likely to refinance down the road because rates will be higher then vs. now. Who wants to refinance into a higher payment? Not too many people, there will be less incentive torefinance in 10 years if mortgage rates are higher than current market rates. That said, why would you want to invest in a current production (current market rate) debt coupon if rates are going to be higher in the future?

The MBS AFTERNOON commentary was fairly robust. And you also have the write up on the Fed Announcement to read, so we'll keep the words to a minimum and give you some charts to consider going into the rest of the week. Two ways to look at things at the moment... 1. You could consider the progressively higher tsy yields this week the formation of a trend supported by incrementally higher technical levels... OR 2. You could consider the higher yields the "ratcheting" up of incrementally higher technical levels that is waiting either for confirmation or a release of it's kinetic energy by NFP, et. al...

The FOMC Statement has been released... As we expected no change to the all important "for an extended period" verbiage. Nonetheless the initial reaction in the rates market is NEGATIVE. The 10yr TSY note yield rose to 3.564% and is currently sideways at 3.55%. The short side of the curve reacted well, the 2yr note yield is falling FAST, currently at 0.916% after reaching 0.952% before the auction. Rate sheet influential MBS coupons have given back a few ticks. The FN 4.0 is now -0-08 at 97-29 and the FN 4.5 is trading -0-07 at 100-20. Lenders May Reprice for the Worse. We are not panicking...the yield curve is too steep and we expect it to correct which will bring down the 10yr yield and help rate sheet influential MBS prices recover. Will provide logic asap...

MBS are a trading a tick higher or lower than unchanged on the day. That's 100-16 on the 4.5. Tsy's meanwhile are languishing, with the 10yr down 11 ticks, pushing the yield up to 3.50. The 30yr bond is down 21 ticks, pushing the yield up to 4.370. As far as MBS and the Tsy market are concerned, when one is unchanged on the day and the other is noticeably higher or lower, it allows us (usually) to draw conclusions about movements in spread. The one thing you'd want to be cautious about would be whether or not there were fundamental changes in the prepayment expectations of MBS, but in the absence of that, you can generally assume the following. If you see MBS holding steady like it is today and treasury yields are rising, it's normally an indication of spread TIGHTENING. If you need the refresher, that simply means MBS yields and Tsy yields are CLOSER TOGETHER. As we noted yesterday, the strength in MBS spreads continues to impress (and mystify to some extent). With the MBS current coupon at 4.3465 (calculated with our proprietary secret magic), that puts spread to the 10yr tsy at 84bps. That's very tight folks.. Maybe even tighter than it should be... Even if one were to assume to Fed would not be exiting in March, these are the spread ranges that begin to resist further meaningful tightening.