Yes, this is in fact one of those ostensibly depressing "down" days with MBS prices pervaded by red numbers.  Here's how we closed out the day:

FN30__________________________________

FN 4.5 -------->>>> -0-10 to 100-23 from 101-01

FN 5.0 -------->>>> -0-07 to 101-27 from 102-02

FN 5.5 -------->>>> -0-06 to 102-13 from 102-19

FN 6.0 -------->>>> -0-05 to 103-01 from 103-06

Against the backdrop of recent memory, this isn't horrible, but it's not a "light" day of selling either.  There is a modicum of solace however.  Unless you were lathered up in Light Sweet Crude today, everyone took it in the shorts.  The dow was over over a percent.  Treasuries got bruised.  Even the precious metal Schiffium (aka Gold) was down a buck and change.  We've seen this before!  Money moving to the sidelines.  Uncertainty...  Steepening yield curve placing premiums on "get it back quick" money.  No wonder, then, UIC ("up in coupon" aka, the higher end of the mortgage stack) was better bid today despite stimulus induced prepayment fears for those higher coupons.  But although UIC was better bid, it was not a UIC day in terms of spreads to treasuries.  In fact, lower coupons performed better when compared against their comparable maturity treasuries.

So in a sick kind of way, in which you get no immediate gratification, there are TWO postives for you!  One: there is nothing that mortgage "did wrong" to incur these price losses today--the weakness simply being a factor of market-wide malaise.  And Two: market sentiment showed a preference for the lower coupons (because even though lower coupons lost more in price today, compared against their risk free benchmarks, the lower end held much firmer).  As mentioned, this doesn't do much for you today, other than perhaps mitigate a portion of "red number depression."  When players return from the sidelines, all things being equal, mortgages gained ground today.  Considering the 7 year low in the dow, the fact that anything with the word "risk" associated with it (like MBS) outpeformed treasuries is good, even though fresh supply concerns for treasuries account for much of their underperformance.  This delicate three step dance, (the Wall St. Waltz?), will continue.  Step One: "Hey, The economy is REALLY bad."  Treasuries get demand.  Step Two: "Whoa...  Have you seen how much treasury supply we're creating to fight off this depression?  I think that's WAY too much for current yields to be sustained."  Treasuries Sell Sell Sell.  Step 3: "Oh Hey, you catch those most recent numbers on such and such economic report?"  (or corporate earnings, or anything really).  "Maybe this whole mess IS bad enough after all to necessitate such massive treasury issuance.  Hey...  MAYBE it's going to get even worse!  Ohh Noes!"  Buy Buy Buy. 

What a bunch of yo-yo's...

Anyway, since we are operating in uncharted territory, expect this to continue.  Some days tsy's will toe the water, inch in, walk calmly back to the margarita bucket.  Other days, they'll run boldly into the water and scramble frantically back out.  But gradually, they will get acclimated to their ideal water depth.  Ain't gonna happen in days or weeks, and no one knows exactly where it will be.  But wherever it will be, it's unlikely yields will get high enough to be of immediate concern to mortgages, which have plenty of spread to treasuries as well as primary spread on rate sheets to soak up some higher basis yields.  Sure, if the 10yr goes to 5%, MBS might be in the 6's again, but we'll cross that make-believe bridge if we come to it, which probably won't be until economics text books are looking at 2009 as an "olden days" case study.

Enough of that big picture nonsense...  What were the haps today?

Fairly underwhelming session today.  The treasury announced their monthly borrowing needs in the form of 2's, 5's, and 7's, for a total of 94 billion.  Even though this was in line with expectations, the 10 year note was off over a point.  This retraces almost all of tuesday's 2 point rally.  MBS volume was about 2/3rds of normal, which as we've discussed, can exagerate price movements.  The potential modifications (courtesy of the housing bailout) of higher coupon loans continues to stoke prepayment fears in higher rates.  This is the main reason we saw the lower coupons perform much better versus treasuries today.  Banks holding those higher coupons were in today as sellers.  But we were not without our buyers.

Indeed many a liquidator of higher coupon is moving into lower coupons.  This doesn't necessarily mean 4.0's and 4.5's, unless you're the Fed, who accelerated their buying to a daily average rate (remember the holiday and early close folks!) of just a hair under 5 billion a day.  In their report, posted earlier by AQ, buying was decidedly focused in 4.5's.  This brings us up to 134.8 billion.  Surely you'll encounter those who say "look!  They've spent over a fifth of their money and rates are WORSE compared to when they started."  Heck, you may even be one of them.  Without adding pages and pages to this post, let's leave it at this: patience...  I will say two things though.  Markets price in anticipation.  If rates are "worse" than "when they started," it's because when they started, the expectation of what they were going to buy was already priced into the market.  So falling from that is meaningless in that sense.  If you want to compare, compare rates to when Bernanke first made the announcement.  Indeed rates are much lower now.  One arrow out of that quiver...  Next...  Simply...  What do you think would be happening to mortgage rates if the Fed wasn't soaking up 5 billion dollars a day of demand?  You don't exactly know and neither do I, but one things for sure...  Rates would be A LOT higher.  Last thought would be that, for all the "battleship turning in a river" reasons we've been discussing over the past few months, patience indeed, is the order of the day.

Just one report tomorrow, CPI, which follows after a much higher than expected PPI today.  It's hard to imagine anyone is that concerned with inflation in the short term enough to impact MBS prices, but if the CPI follows PPIs suit, it could create some turbulence on a day of the week that has been turbulent of late.  Tomorrow could go either way.  Treasuries will play a role tomorrow as they have been prone to do recently.  If the selling continues look for more MBS price weakness and spread strength.  If they get some back tomorrow, it will be interesting to see what happens to MBS.  Until the housing bailout, we'd have assumed widening spreads and UIC buying.  But with prepayment fears and the recent comparative cheapening of 4.0 coupons, entering negative convexity territory (when we say negative convexity, think of it as "diminishing returns" for buying down rates the farther below PAR you go), we could see "down in coupon" buying as a departure from recent norms.  Spread widening would still remain fairly likely.  Sensitive deals should remain lock biased as we are still near the higher end of our 2 month range, but with the ever present variable of primary/secondary spreads, there's no telling when a certain lender will drop a bombshell and lower rates significantly with no apparent catalyst from MBS prices.  As Quai Chang Caine once said "expect the unexpected." 

Tune in tomorrow as the MBS legend continues.