As is sometimes the case on Fridays, tomorrow's calendar of scheduled economic data is completely empty, although there are two Fed speakers, Dudley at 830am and Pianalto at 1:45pm. We're fairly fond of anything that we can glean from the Fed these days both because of the nearness in history of the FOMC announcement that rocked the market, it's unprecedented number of dissenting voters, as well as next Friday's Jackson Hole Bernanke speech. But even if the Fed speakers tomorrow do little to move markets, the absence of economic data combined with the epic nature of today's moves in Treasuries, not to mention to potential technical breakdown in stocks, could make for a great day of what we've recently dubbed "trading it out," where we observe the interplay of one market against the other, each relying on a framework of technical trends and stopping points as they gradually come to a consensus with one another. Ha! Who needs octagons or ringside seats?! This is the best brawl we've seen in a long time! For a bit of context, and a closer look at how the technical developments in Stocks and Treasuries have been affecting MBS (and ultimately, what makes its way onto rate sheets), take a look at the following link):

Treasury has now recovered more than 70 percent ($159.5 billion) of its original $225 billion investment in MBS, which it made during 2008 and 2009 through authority provided to it by Congress under the Housing and Economic Recovery Act of 2008. These MBS purchases helped stabilize the financial markets and preserve access to mortgage credit during a period of unprecedented market stress. The MBS market has improved considerably since Treasury purchased these securities. Based on current market conditions, Treasury expects to make a profit for taxpayers on this investment. On March 21, 2011, Treasury announced that it would begin the orderly wind down of its MBS portfolio. Treasury plans to sell up to $10 billion MBS (principal) per month, subject to market conditions. The sale is part of Treasury’s continued efforts to wind down emergency financial crisis response programs that were put in place in 2008 and 2009. For additional details on Treasury’s remaining MBS portfolio, please visit

After poking and prodding at a break up into the 2.10's, 10yr yields are back down to 2.073. Stocks are trending downward and S&P's are currently at 1138.87 still about 4 points higher than lows this morning. MBS are mostly along for the ride, but whereas Treasuries enjoy the roller-coaster, MBS are a bit nauseous. In other words, Treasuries are a direct beneficiary of the stock sell-off and volatility--a true "safe haven" for flight-to-safety bidding. MBS never gain as well as TSYs when the "risk-off" sentiment pervades markets. But MBS have been able to claw their way at least back above yesterday's closing marks in 4.0's and actually bounce at yesterday's closing marks in 3.5's. Combined with the 10yr note holding under 2.10, these are promising technical developments. They speak to an entrenchment against rapid losses into the afternoon, whereas that might have been a fear if you simply saw MBS prices move from record highs at 10am sharply to the lows of the day by noon. For now, that particular dip in the roller-coaster ride appears to have leveled off. Watching how stocks respond to the approach to their lows of the day for further bond-market guidance. Some of the reprices for the worse that came across now look out of line with the day's market movements. Maybe other factors at work there... Could make sense given strong rate offerings under 4.25% may have spurred a lot of lock demand yesterday and this morning. The rapidly correcting market provided a good opportunity for a big reprice (or two) from lenders who not only needed to adjust for market conditions but also control the pipeline a bit. There's an implication here, and that is that sideways or even improving prices don't mean immunity from reprices for the worse. Know your lender though. Some are more predisposed than others to pipeline motivated price changes.

Production MBS coupons have given back early morning gains thanks to widespread profit taking in the bond market. The Fannie Mae 4.0 is currently bid +2/32 at 104-16 after trading as high as 105-05 following a weak regional manufacturing read at 10am. This fall from new record highs is enough to warrant reprices for the worse. Beware. The pain will be most felt at rates below 4.25%.

S&P's hit 1135 at their worst this morning and are now back up to 1145. Bond markets followed suit and have risen from 1.97 to 2.06. Fannie 4.0's are down to 104-21 and 3.5's are at 101-28. That brings the price spread between the two MBS coupons EXACTLY back to 2-26, a level we've been discussing for a few days as a tipping point for 3.5 coupons gaining more prominence. We're not sure if lenders are already considering repricing for the worse, but it's a tragic possibility among those who got overly aggressive in response to the rally. But we'd urge you to consider the timing of the initial rate sheet in relation to MBS price movements today and then of course, whether or not you've seen any reprices for the better before any "panic lock."