Early in the session MBS fell victim to the reactive biases of day trading stock market participants. Stocks were intially led higher by manufacturers after a broker upgrade of Caterpillar and better than expected forward looking guidance from Boeing. Right around noon stocks began to move lower and like clockwork TSY prices moved higher (yields lower) which allowed MBS buyers to take advantage of cheaper dollar prices of MBS coupons. Production MBS coupons are at the highs of the day once again....but remain alert!!!

Since 5pm "Going Out" Marks....

FN30__________________________________

FN 4.0 -------->>>> +0-06  to  100-03   from 99-29

FN 4.5 -------->>>> +0-04  to 101-29    from 101-25

FN 5.0 -------->>>> +0-01  to 102-30    from 102-29

FN 5.5 -------->>>> +0-00  to 103-21    from 103-21

FN 6.0 -------->>>> +0-00  to 104-15    from 104-15

GN30_________________________________  

GN 4.0 -------->>>> +0-03  to 100-07   from 100-04

GN 4.5 -------->>>> +0-01  to 102-04   from 102-03

GN 5.0 -------->>>> +0-02  to 103-17   from 103-15

GN 5.5 -------->>>> +0-01  to 103-30   from 103-29

GN 6.0 -------->>>> +0-02  to 104-11   from 104-09

I inserted this chart about 5 min after I posted. Since then the FN 4.0 has come off its intraday highs and is bouncing around price levels near 100-00. Given the short attention span of stock traders we wouldnt be surprised if production MBS coupons bounce around between 100-04 and 99-24 for rest of the day...

We usually dont jump too far into the other side of the market...but since stock trading is effecting TSY flows which are affecting MBS pricing...we will switch our hats from fixed income to equities for a moment.....

Recent market flows have been predicated off of earnings reports and optimistic Fed speak. However it should be pointed out that many "better than expected" earnings reports are a function of massive cost cutting as opposed to capital accumulation and higher worth. Regarding the market's positive reactions to "we see a light at the end of the tunnel" Fed speak...one should not lose sight of the fact that much of the recovery process is dependent upon the psychological well being of consumers and investors...which is why the Fed has been sure to remind that the economic recovery process will be slow and the timing of which UNKNOWN.

So, that said, regardless of company outlooks and the perspectives of sell side equity analysts...financial markets will remain hostage to the bottoming out  or "cresting" of economic data.  This means that economic reports are once again HEADLINE NEWS (remember when no one cared about data because it was all getting worse at a record pace). If economic data shows continued signs of a bottoming out process, or at least a slow down in the pace of economic contraction, markets will react quite favorably...much of the same way they did in early March.There a few other looming "issues" as well...like the possibly bankruptcy of GM and the release of bank stress tests....both of which are keeping a lid on long term convictions of equity traders.

If we take the perspective that stock markets are poised to enter a period of bear/bull market rally.....fundamentally, there are negative implications over the MBS market. Remember MBS, although insulated from broad market flows, still takes its directional guidance from the steepness of the yield curve and the intraday movements of Treasury yields. So if TSYs sell off MBS will mostly likely follow, although not to the same extent. Now this of course is assuming that credit markets are functioning in an ordinary fashion...not the case at all!

At the moment the Federal Reserve remains at the ready to artificially flatten out the belly of the curve (UST5YR through UST10YR) in the event of a stock market rally and subsequent investor exit from "flight to quality" positions in TSYs. This will be a necessity if the Federal Reserve's balance sheet is to continue to earn positive cash flows. (If the yield curve steepens it raises the cost of borrowing for the US Government...which means the MBS the Fed owns will earn less yield relative to US borrowing costs).

Plain and Simple: We believe, in the event of a bull market rally in equities and TSY sell off...that the Fed will step in to provide stability in the TSY market in an effort to stabilize mortgage lending costs. The US Government will have to do this at least until the end of the year if the mortgage market is to remain liquid and if housing is to stabilize.

So..all that said....We will be attentive to the forward looking indicators and the health of the labor market as a source of directional guidance regarding MBS.