If you were to see that Fannie 4.0's and 10yr notes are both just over a point in price better today, that doesn't give an accurate sense of just how much MBS have tightened to benchmarks. When we talk about "tightening to benchmarks," we're just referencing the relative performance of MBS to 10yr Treasuries (although there are other popular benchmarks such as 10yr swaps). As we discussed yesterday and many times in the future, "volatility" is an enemy of MBS. But we're not talking simply about the visual choppiness in charts. In fact, charts can LOOK volatile without an elevation in the volume metrics on which MBS rely. With the Fed getting explicit on short term rates outlook through mid 2013, volatility is WAY WAY WAY down versus yesterday morning. The most widely used metric is down from 113 to 106. (If you're curious, the metric in question is the "at the money" basis point level of 3m variable / 10yr fixed swaption straddles, and 7 bp swings are nearly unheard of). And MBS love it! 4.0's are up ANOTHER full point (which is actually more like a point and a third by the time you factor out yesterday's roll) to 104-23. 3.5's are up just under a full point (again, more without the roll), to 101-29. Rate sheets have been slow to come out in this morning, but early reports suggest INSANE improvements... Ha... a nearly 102 handle on Fannie 3.5's the day after the roll is apparently a good thing for rate sheets. (the following link is to a great educational piece on volatility in MBS and other fixed income markets):

(Reuters) - U.S. wholesale inventories in June posted their smallest rise in seven months as sales rebounded more than expected, a government report showed on Wednesday, pointing to a moderate build-up in unsold goods, which should support manufacturing. Total wholesale inventories rose 0.6 percent to a record $458.7 billion, the Commerce Department said, following a 1.7 percent rise in May. Economists polled by Reuters had expected stocks of unsold goods at U.S. wholesalers to rise 1 percent. Inventories are a key component of gross domestic product changes and June's moderate rise in wholesales stocks should be positive for manufacturing in the second half. Wholesale inventories in June were supported by a 4.3 percent rise in motor vehicle stocks and computer equipment, which rose 3.5 percent. Sales at wholesalers increased 0.6 percent to an all-time high of $395.8 billion after falling by a revised 0.3 percent fall in May. Analysts had expected sales at wholesalers to rise 0.3 percent after a previously reported 0.2 percent drop in May. At June's sales pace, it would take 1.16 months to clear shelves, unchanged from May. (Reporting by Lucia Mutikani; Editing by Neil Stempleman)

(WSJ) The Obama administration will announce plans Wednesday to seek investors' ideas for turning thousands of foreclosed properties owned by government-backed entities into rental homes, according to administration officials. The move is intended to put a floor under declining home prices by creating a way to deal with hundreds of thousands of potential foreclosures in coming years. Mortgage giants Fannie Mae and Freddie Mac sold a record 100,000 homes during the second quarter. Together with the Federal Housing Administration, the entities owned about 250,000 homes at the end of June, or around half of all unsold, repossessed properties. Another 830,000 homes backed by the entities are in some stage of foreclosure, according to Barclays Capital. The Federal Housing Finance Agency, which regulates Fannie and Freddie, will issue the formal "request for information" with the administration to solicit proposals that shrink the glut of foreclosed properties weighing on the residential market.

In the context of yesterday's range, it may actually be more of a "meow," but regardless of how you classify it, bonds were weaker overnight and now 10yr notes are already nearly a point better in price, 10bps lower in yield to 2.17. A steeper yield curve has rapidly given way to flattening. The stock lever is exceedingly connected. Data is limited this morning, with only Wholesale Inventories on tap at 10am. The more notable event is the 10yr auction at 1pm. Between now and then, just "trader's paradise," or "trader's hell" as the case may be as many a market participant attempts to navigate through the pain trade with minimal pain. Fannie 4.0's are up 16 ticks at 104-06 and 3.5's are up 19 ticks to 101-17. We are constantly tracking the actual level of new MBS originations and naturally can observe an uptick in 3.5 volume that we'd expect to continue at these prices. But there were still 10 times more 4.0's originated yesterday than 3.5's. So even at 104+, 4.0's remain pertinent until 3.5's capture more of the origination share. We'd be keeping an eye on both though.