As we roll out of the sleeping bags this morning and reach for the propane burner to fire up some coffee, looking around, we notice that the tents have not slid down the icy cliffs.  Observe:

This is a good thing and exactly what we were hoping for into this potentially volatile day.  Volatility is high today due to the absence of scheduled data, more statements on auto bailout, and the fact that it's "quadruple witching" which means that a) index futures, b) stock options, c) index options, and d) Stock futures (see? quadruple!) all expire.  This creates the potential for a lot of money to be changing hands in unexpected ways.  Most of the time, there are expectations as to what option large accounts will exercise, but in this day and age, there can be money flow surprises and new precedents are being set (as can be evidenced in Deutsche Bank's recent bond option shake up)

Still, it is quite positive that despite fluctuations in treasuries, MBS seem to be singing their own tune.  Well, it feels more positive on days where treasuries are down and we are unchanged (like today).  MBS closed much of the gap in spread overnight.  Or it would be more appropriate to say that treasuries closed that gap by selling off a bit.  Another positive disconnect is between MBS and swaps.  Funding costs rose yesterday yet MBS held steady (ish). The 2 year swap spread rose from roughly 76.5 bps to 84 bps.

So what's the gameplan now?  All we are trying to do is make it to rate sheet print time without a sell-off.  If that's the case, and you stay tuned to the blog today, you should be able to avoid any reprices for the worse.  However, there is a miniscule dark cloud on the horizon depending on your interpretation.  Although the argument can certainly be made the the fundamental backdrop for MBS is, well, fundamentally different than in years past, it should be noted that during the last 2 years we've seen a bit of selling in the 2 week period centering on Christmas.  Much of this has to do with market participation being low, and in both years, prices returned soon after and improved, but it it is just something to be cautious about for those most short term of deals.  If we continue to hold steady today, and depending on the extent to which you want to accept history as an indicator, this afternoon may be a day to lock those deals that have to fund over the next two weeks.  Then again, the Fed could buy a few billion of MBS some time next week and all that would be out the window. 

So for now, tread lightly as we don't want to cause any avalanches.  The temperatures are dropping this AM, so things should firm up on our mountain, and base camp may yet hold, but the "unexpected" looms as a potential party-pooper, or is that an abominable snow man? 

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Data:

MBS:

Other Data:

Treasuries: 2 yr UST: down 3 ticks, .73%,   3UST down 5 ticks at 1.00%, 5UST down 7 ticks at 1.313%, 10UST down 9 ticks to 2.105%, 30YST down 22 ticks to 2.57%.

Swap Spreads: 2 yr down a bp to 83, 3 yr down .75 of a bp to 77.5, 5yr up a bp to 73.75, 10 yr up 5bps to 26.75, 30 yr up 6.75 bps to negative 11.75

Misc: Stock futures up a bit, Oil with a $34 handle,