As mortgage-backs make their way  towards the exits, prices are holding near unchanged on the day.

The FN 4.0 is +0-01 at 99-17 yielding 4.053% and the FN 4.5 is trading +0-00 at 101-28 yielding 4.271%. The secondary market current coupon is 4.108%. The CC yield is +78/10yr TSY and +69/10yr swap. Wider on the day.

Below is the FN 4.5 two day. The 101-28 level we pointed out this morning has indeed held its gravitational forces through the session...we call this a pivot point. Everyone give MG a high five for that call. Unfortunately,  yesterday's late day weakness is likely to happen again today...so we wouldnt be surprised to see prices bounce lower from 101-28.

In regards to MBS specific trade flows, sellers dominated today.  Originators were selling loan supply this morning into the afternoon, an expected event given the currently rich dollar prices of production MBS coupons. Overall about $3 billion was sold by pipeline managers . Other than that, money managers and hedge funds were taking profits (selling!) while other traders reported selling from Asian central bankers.

Earlier in the session servicers were buying "rate sheet influential" MBS coupons as the yield curve flattened and MBS cash flows shortened. It is expected that mortgage servicers will add "duration" to their income stream as the yield curve flattens. This is a function of  the relationship between the shape of the yield curve and prepayment speeds. Flatter curve = faster prepayment speeds. Faster speeds = shorter MBS cash flow life.

Plain and Simple: when the yield curve flattens, it is expected that MBS cash flows will shorten. This forces mortgage servicers to rebalance the now longer life of their outgoing cash flows vs.  the now shorter expected life of their incoming cash flows.  Hence, why servicers buy less prepayment sensitive MBS coupons (priced close to 100-00) when the yield curve flattens..it adds duration to their cash flows.

Although the Fed was helping balance out trade flows today, they were not as active as one might have thought given added selling from originators. Anyone think the Fed is trying to lure some of that bank cash off the sidelines?

By letting yield spreads widen out a few bps, the Fed may be able to draw in "bargain buyers" or anyone looking to put a large amount of CASH to work (which banks have a lot of right now). Spreads still need to leak out a few bps before that happens though. Thinking ahead to when the Fed exits the agency MBS market...banks will have a lot of cash to put to work then too...perhaps supply stays slow enough to keep the TBA MBS market liquid on its own?

Just an FYI, if youre floating. I still think locking is a better move than floating right now. Rates are near record lows and rebate is juicy. Take some profits on your pipeline!