It's been a choppy morning for Treasury and MBS prices. Since the MBS OPEN, 10yr TSY yields have moved back over 3.62% and  "rate sheet influential" MBS prices have lost some ground. 

Currently mortgages are at their weakest levels of the day. The FN 4.0 is -0-07 at 97-29 yielding 4.203% and the FN 4.5 is -0-06 at 100-27 yielding 4.418%. The secondary market current coupon is 4.386%.

The stock lever has been quite influential over the past 24 hours. The underlying logic is that traders were operating under a  "SELL NOW ASK QUESTIONS LATER"  influence yesterday after the Obama administration announced plans to reform the banking sector. This FORCED a "flight to safety" bid into TSY and helped MBS prices appreciate. Unfortunately, looking back on it,  no details or timeline were provided by the administration and some think equities may have overreacted. This raises a speculative eyebrow that stocks may be due a bargain bid.  If stocks do start to recover yesterday's retracement, it would be a bad event for the Treasury market as "flight to safety" positions are unwound.

Plain and Simple: Treasury yields and MBS prices are sensitive to the the stock lever. If stocks start to recover from recent weakness, mortgage rates will rise. (Plus 10s are looking overbought)

Check out the mirror like reactions. TSY futures price in TEAL and S&P futures in RED.

 Since the econ calendar is empty and politics seem to be driving price action, we might as well discuss Ben Bernanke's pending re-nomination confirmation.  I am not sure whether or not this is just political poo slinging or if opposition is REALLY building against Bernanke, but we have yet to get a clear idea on when a vote will be taken. If Senate reds and blues fail to find time to figure out "ayes" and "nays" before January 31...Ben will lose his seat as the Chairman of the Federal Reserve.

How might this affect the markets?

The street generally likes Benny B. so one would have to assume that stocks would sell off on Feb.1 if BB is not reconfirmed. In regards to TSYs and MBS, if stocks sell it should benefit TSYs in terms of directionality (lower yields). The extent to which the yield curve flattens or steepens depends on who replaces Ben...there is some confusion on this though.

This is from Reuters:

"What happens if Bernanke is not confirmed by the end of his term is open to interpretation. Some believe that since he is serving a separate 14-year term as a member of the Fed board, he could be tapped by the board to serve as acting chairman.  Under law, the Fed's vice chairman leads the central bank in the "absence" of a chairman, but absence is not defined.  On two previous occasions a chairman has not been confirmed by the time his term ended and has continued to head the Fed.  In both instances, however, the board was without a vice chairman and the chairman was elected by the board to continue to serve in an acting capacity as called for by law. The Fed currently has a vice chairman, Donald Kohn."

Kohn is an inflation DOVE...meaning he is not so concerned about inflation. Kohn believes the recovery will be slow as unemployment wieghs on economic activity. For the most part he is supportive of Bernanke's policy initiatives.

This would imply, if Bernanke is not reconfirmed, that there would not much change in the shape of the yield curve besides the initial FLIGHT TO SAFETY.  If I was trading it I might bet on a bull steepener as the lack of confidence in the Fed's independence would likely increase anxieties about the effectiveness of monetary policy in the long run. READ MORE ON THE SHAPE OF THE YIELD CURVE

As I write this, the following news just flashed across my viewer:

10:54 22Jan10 RTRS-WHITE HOUSE SAYS OBAMA CONTINUES TO BELIEVE BERNANKE IS BEST  PERSON TO LEAD FED
10:55 22Jan10 RTRS-WHITE HOUSE SAYS OBAMA CONFIDENT SENATE WILL CONFIRM BERNANKE  TO SECOND FED TERM

In my opinion Bernanke has done an excellent job in backing our economy away from the ledge. He knows more about this crisis than any other brain and should be our Federal Reserve chairman. I feel like this is getting too political...which is the LAST THING we want happening. THE FED MUST MAINTAIN THEIR INDEPENDENCE OR THE MARKET WILL LOSE CONFIDENCE IN THE SYSTEM.

Looking ahead toward the rest of the day...watch the stock lever!  If the S&P moves over 1115 look for 10s to cross over 3.62%...if this occurs watch for REPRICES FOR THE WORSE