The MBS coupon stack has been subjected to the sentiments of the TSY market this morning. Flight to quality helped push MBS prices higher early in the session, however quarter end balance sheet strengthening tactics have brought about fast money TSY traders looking to take profits while "the getting is good"...when TSY profit takers emerge you can count on some MBS selling...which is what we have seen thus far today.

The MBS stack is however attempting to rebuild after a brief period of consolidation.

Here's the current tick by tick chart today:

Another aspect of mid morning MBS selling coincides with TSY yields rising following the release of today's Fed TSY purchases . The market perceived the Fed participation in longer maturity bonds as "less than expected". When the results were announced TSY yields instantly rose and MBS spreads grew tighter which put selling pressure on the MBS coupon stack. Reactions illustrated in chart below....

FN30_______________________________

FN 4.0 -------->>>> +0-04 to 100-13 from 100-09

FN 4.5 -------->>>> +0-01 to 101-30  from 101-29

FN 5.0 -------->>>> +0-02 to 103-00 from 102-30

FN 5.5 -------->>>> +0-02 to 103-21 from 103-19

FN 6.0 -------->>>> +0-04 to 104-13 from 104-09

GN30______________________________

GN 4.0 -------->>>> +0-05 to 100-17  from 100-12

GN 4.5 -------->>>> +0-05 to 102-04 from 101-31

GN 5.0 -------->>>> +0-05 to 103-17 from 103-12

GN 5.5 -------->>>> +0-02 to 103-30 from 103-28

GN 6.0 -------->>>> +0-04 to 104-14 from 104-10

Chart: 10YR Treasury Yields vs. FN30 4.5 MBS coupons

Note around 1100AM when the Fed released the details of their purchases of TSY securities today. TSY traders were expecting a little more buying from the Fed today. MBS (teal) prices fell as TSY yields rose....

Here is what the day looks like in terms of actual YIELD SPREAD (not YSP!  The graphical representation of the difference in MBS yield and TSY yield.  Lower = tighter)

Remember: Higher TSY yields means tighter MBS/TSY spreads which is an indication of MBS selling to come. Once spreads gap out(widen) MBS buyers will look to return to the market because MBS will be relatively cheap vs. their benchmark big brother TSYs (benchmark= what you compare your returns to).

Last week primary and secondary mortgage markets cleaned up the clutter caused by the ambush of activity that was spurred on by the FOMC's decision to augment Agency MBS purchases and flatten the benchmark TSY yield curve. The increase in the new mortgage applications overwhelmed supply/demand technicals early in the week which created a very volatile environment for rate sheets...however by week's end normalcy had returned to the mortgage market and borrowers were once again contemplating the decision to whether or not to vacate their fence sitting positions. After all was said and done MBS was relatively flat.

This week starts with quite a bit of information to bake into valuation models. Quarter end window dressing activities (cleaning up balance sheets) will serve to push markets to remove funds from risky securities in favor of cash. The US automakers are once again in the spotlight with the market wondering whether or not a government reorganization is imminent...aka a bankruptcy. Not to mention markets will be postulating, hypothesizing, and straight up guessing on the outcome of Friday's Employment Situation Report.

Looking forward MBS has month end portfolio manager buying to look forward to...this provides added support and liquidity (as if any was needed) for your rate sheets. Primary /secondary spreads are currently mixed /slightly tighter...rate sheets are generally improved a few bps this AM. Money will moving in a volatile fashion as the market continue to digest and decipher  the effectiveness of  government spending programs.

Speaking of government spending programs...

Over the weekend the inefficiencies of TARP were magnified after Treasury Secretary Tim Geithner was questioned about remaining TARP funds on a Sunday morning talk show.  Geithner said "some banks are going to need large amounts of assistance". The foul sentiment arises from these statements because the government has already outlaid over 80% of the $700bn in funds appropriated  for TARP. This implies only $135bn TARP funds are left to assist the banks that Geithner believes will need large amounts of assistance in the future. When asked whether or not he would ask Congress for MORE MONEY he said....."If we get to that point, we'll go to the Congress and make the strongest case possible and help them understand why this will be cheaper over the long run to move aggressively". Naturally this does not provided a warm and fuzzy feeling for equity traders....which has added to sell off in stocks today.

Vic outlined the week ahead in Economic Reports in his morning post. Its written with the mortgage market in mind. Read Here